Fixed Income  

BlackRock’s Rosenberg predicts negative fixed income returns

BlackRock’s Jeff Rosenberg has warned investors to expect negative returns from core fixed income holdings in 2013.

The group’s chief investment strategist for fixed income said returns would be boosted if 10-year interest rates fell roughly 75 basis points – from 3 per cent to 2.25 per cent – but said this was “not likely to happen”.

“Our view remains somewhat more cautious on the strength of the recovery fuelling rising rates,” he said.

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“For the remainder of the year, investors can expect to recoup some losses from coupon income and even some potential for further modest gains under our year-end rate forecasts.

“However, absent more significant declines in interest rates that remain outside of our forecasts, investors should expect negative returns from core fixed income in 2013.”

The strategist said if 10-year interest rates declined 50 basis points he could foresee losses of just below 0.8 per cent for 2013 but if 10- year rates remained at 3 per cent, he forecast losses of 2.9 per cent.

But he said if the cost of servicing 10-year debt in the US rose 50 basis points, losses would be 4.9 per cent for the year and the losses would be amplified in a scenario where stocks and bonds fell together.

Mr Rosenberg said the losses in fixed income in May, June and August were “some of the most severe” in his recent experience.

He added that what was notable about the losses was that they occurred as stock prices fell, “breaking the historic relationship expected between bonds and stocks in which they move in opposite directions, what I call ‘ballast’”.

Mr Rosenberg said the potential for a yearly loss to core fixed income was a “rare occurrence” and if the Barclays US Aggregate index fell in the year, it would be only the third annual negative return to core fixed income since 1980.

“The loss validates our long-run themes on fixed income that we have discussed for some time,” he said.

“The problem with today’s fixed income universe is traditional fixed income strategies are overly reliant on falling interest rates and exposures to government-related securities for their returns.

“Such strategies made sense when those two features supported returns; now they detract.”

Mr Rosenberg said because interest rates would normalise it was likely there would be “more losses in terms of annual returns to come in the future from traditional core fixed income investing”.

Elsewhere, Mr Rosenberg said investors needed to consider further fiscal policy uncertainty because of the debt ceiling still looming as an issue.