As market volatility influenced by various global factors, including President Donald Trump’s tariff discussions, investors are urged to maintain a focus on income generation. Russell Brownback, head of BlackRock’s global macro positioning team for fixed income, suggests that looking beyond traditional fixed-income holdings may lead to attractive yield opportunities.

Market Conditions

Despite recent fluctuations in the 10-year Treasury yield, Brownback emphasizes the overall resilience of the economy. He pointed out several robust indicators:

• A structurally tight labor market.
• Pristine private sector balance sheets.
• Record-high wealth levels compared to disposable incomes.

According to Brownback, the ongoing artificial intelligence revolution is poised to drive significant infrastructure developments throughout the decade, enhancing productivity in its formative stages. He stated, “There’s going to be noise about policy implementation, but we feel pretty good about the underpinnings of the economy today,” indicating confidence in sustaining a benign credit cycle.

Investment Strategy Shifts

Brownback recommends shifting perspectives on fixed income from duration to income. This change arises from evolving market dynamics, particularly highlighting the inherent risks in the Treasury market due to policy and inflation uncertainties. He noted:

“Fixed income, to us today, is about income as opposed to duration.”

Investors are encouraged to consider strategies that diverge from traditional benchmarks to optimize their investment regimes.

Portfolio Preferences

With over 25% of the BlackRock Strategic Income Opportunities Fund’s assets allocated to securitized products, Brownback identifies this area as particularly promising. The fund holds:

• 6.8% in non-agency mortgage-backed securities.
• 6.1% in commercial mortgage-backed securities.
• 5.7% in asset-backed securities.
• 8.5% in collateralized loan obligations.

Adopting a barbell investment strategy, he focuses on high-quality, short-dated, triple-A rated segments of these asset classes, which appear undervalued compared to corporate credit.

High-Yield Opportunities

Brownback acknowledges selective opportunities within high-yield bonds across the U.S., Europe, and Asia where the quality of corporate bonds has improved significantly. He noted a shift in the ICE BofA US High Yield Index composition over the past 15 years, with approximately 50% now comprised of BB-rated bonds versus a notable decrease in CCC-rated bonds.

While the fund’s exposure to investment-grade credit is limited, Brownback does see value in European investment-grade bonds, particularly due to favorable currency dynamics and solid technicals.

Future Outlook

The fund also includes around 22% in agency residential mortgages, which despite being historically underpriced relative to investment-grade credit, are facing some technical challenges. He explained:

“We don’t think rates are going too far in either direction, so that negative convexity won’t be realized.”

This nuanced outlook suggests a strategic positioning in a highly liquid sector compared to investment-grade markets, with an ability to pivot based on real-time opportunities.