FOR PUBLIC DISTRIBUTION IN THE U.S., CANADA, LATIN AMERICA, HONGKONG, SINGAPORE AND AUSTRALIA. FOR INSTITUTIONAL, PROFESSIONAL, QUALIFIED INVESTORS AND QUALIFIED CLIENTS IN OTHER PERMITTED COUNTRIES. Bonds and stocks can go down at same time Theme 2 Correlation of U.S. equity and government bond returns 75% Rethinking 50% on25% bonds elati0% ror Fixed income finally offers The negative correlation between C-25% “income” after yields surged stock and bond returns has already globally. This has boosted the flipped, as the chart shows, meaning -50% allure of bonds after investors were they can both go down at the same starved for yield for years. We take time. Why? Central banks are -75% a granular investment approach to unlikely to come to the rescue with 1960 1970 1980 1990 2000 2010 2020 capitalize on this, rather than rapid rate cuts in recessions they taking broad, aggregate exposures. engineered to bring down inflation Chart takeaway: A cornerstone of portfolio construction in recent The case for investment-grade to policy targets. If anything, policy rates may stay higher for longer than decades was that bond prices would go up when stocks sold off. We credit has brightened, in our view, the market is expecting. think this correlation has broken down in the new regime. and we raise our overweight tactically and strategically. We Investors also will increasingly ask think it can hold up in a recession, for more compensation to hold long- with companies having fortified term government bonds –or term their balance sheets by refinancing premium –amid high debt levels, debt at lower yields. Agency rising supply and higher inflation. mortgage-backed securities –a Central banks are shrinking their new tactical overweight –can also bond holdings and Japan may stop Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, November 2022. Notes: The chart play a diversified income role. purchases, while governments are shows the correlation of daily U.S. 10-year Treasury and S&P 500 returns over a rolling one-year period. Short-term government debt also still running deficits. That means the looks attractive at current yields, private sector needs to absorb more and we now break out this category bonds. And so-called bond vigilantes The lure of fixed income is strong as into a separate tactical view. are back, as seen when market surging yields mean bonds finally offer In the old playbook, long-term forces sparked a yield surge to income. Yet long-dated bonds face government bonds would be part of punish profligate UK policies. the package as they historically As a result, we remain underweight challenges, we believe, making us prefer have shielded portfolios from long-term government bonds in short-term bonds and high-grade credit. recession. Not this time, we think. tactical and strategic portfolios. 66 2023 outlook 6 2022 midyear outlook BBIIIIMM1122U/M1222U/M--26121472617935--66/16/16