Some Worries May Be Inflated

Inflation will likely heat up in the coming months, but not to worrying levels.

Astute bond investors always keep an eye on inflation. After all, future coupon payments on fixed-rate bonds can lose purchasing power if the price of goods and services rises.

A commonly heard argument these days is that the extraordinary rescue measures taken by the Federal Reserve to help stabilize the economy and financial system in the wake of the pandemic will ultimately result in inflation exploding higher. We think that is unlikely to be the case.

We believe that last year’s broadly deflationary influences may well shift to somewhat higher rates of inflation by mid-2021, but we don’t think this will reach excessive levels. The fact is that demographic trends of population aging and disinflationary technological headwinds are both likely to keep generalized price increases moderate in the years to come.

To put it simply, we think that in the current economic environment, there is not enough demand growth to drive significantly escalating inflation for a persistent period of time and technology is helping to greatly increase supply.

The BlackRock Strategic Income Opportunities Fund posted a strong return for the month of December as risk assets rallied into year end. Exposures to U.S. high yield credit, structured products, emerging market debt and Asian credit drove the fund’s gains, while duration positioning (interest rate sensitivity) was a hindrance.

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Bob Miller
Head of the U.S. Multi-Sector Fixed Income

Rick Rieder
Chief Investment Officer of Global Fixed Income and Head of the Global Allocation Team