Don’t let Great Rotation cover holes in existing fixed income portfolios, warns Blackrock

The BlackRock Investment Institute has published a new report into the hidden risks it says lurk in fixed income portfolios.

The report – Forget Rotation: Think Risk Mitigation – suggests that while there is considerable focus on the so-called Great Rotation out of bonds into equities, there are instead dangers in fixed income that investors should look to remedy.

The Investment Institute said that that the foundations for a sustained risk rally are “shaky”. In the meantime, bond portfolios are offering fewer diversification benefits and more risk than previously.

The low yield environment means that even small rises in yields could wipe out income generated from holding safer fixed income instruments such as US Treasuries.

Investors should therefore focus on the following types of actions:

   • Uncover Risks: Recognize hidden risks in bond portfolios and consider diverging from fixed income benchmarks-or even abandoning them.

   • Go Short: Shorten duration and emphasize higher yielding credit over “safe” government bonds.

   • Change Gears: Markets tend to overshoot. Be ready to take advantage by rotating duration, credit sectors or asset classes.

   • Focus on Income: Do not count on capital gains in bond sectors that have had a great run such as US municipal bonds. Buy them for income

   • Quality Bargains: The hunt for yield has boosted not-so-great income assets. Climb up the quality ladder for a small loss in yield.

   • Buy Insurance: Volatility in most assets is very low, so options to protect against downside risks or participate in upside opportunities are cheap.

   • (Bond) Pickers Welcome: Correlations between asset classes are breaking down. This puts a premium on security selection.

   • Neutral Bliss: Reduce market exposure by buying favored assets and simultaneously selling short similar but less desirable securities.

To read the full report click here: [asset_library_tag 6359,Forget Rotation Think Risk Mitigation]

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