Reconstruct Your Fixed Income Portfolio

7/29/2019 Reconstruct Your Fixed Income Portfolio

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Intin r a Nw WrTM:Rcntruct Yur FiIncm PrtiA Conversation With Jerey Rosenberg, ChieInvestment Strategist or Fixed Income


2/12

Its a New World or xed income investing. For decades,

investors in xed income have enjoyed healthy total

returns rom a steady secular decline in interest rates

(and concurrent rise in bond prices), but with bond yields

at historic lows, the income in xed income has all butdisappeared. This reality has become treacherous or

retirees and investors in need o income and highlights

the real question that is on everyones mind: So what do I

do with my money?

To shed light on some answers and oer ways to

reconstruct your xed income portolio or this New

World, we spoke with Jerey Rosenberg, BlackRocks

Chie Investment Strategist or Fixed Income. In thisinterview, Mr. Rosenberg argues that investors need

to think dierently about xed income: increasingly

investors will be orced to choose between preservation

o principal and income objectives. In the past, the same

strategy could achieve both. Today reconsidering what

constitutes a risk-ree investment and weighing

alternative approaches to the traditional benchmark

style o xed income investing will be necessary to

achieve these goals.

Highlights o our conversation include:

}Rebuild your fixed income portfolio. What worked in the past may not work in the

future. Declining interest rates (and rising bond prices) has been the winner for the

past 30 years in fixed income and hence owning the benchmark portfolio made

sense. But with continuing aggressive accommodative monetary policies across

the globe combined with gradually improving US economic conditions and halting

progress in the European sovereign crisis, the risks are heightened that interest

rates will rise over the longer term.

}Diversify fixed income risk sources while improving yield. With traditional benchmarkfixed income portfolios currently providing negative yields after inflation, investors

should consider increasing allocations to fixed income sectors with better inflation

resiliency including floating rate loans (bank loans) and high yield.

}Consider alternative fixed income strategies. Within an environment of policy-induced

market volatility and slow economic growth, traditional benchmark style investing

will suffer under rising interest rates. Investors should consider incorporating alternative

portfolio management strategies or styles such as flexible and long/short strategies

that may be able to take advantage of a wider range of investmentopportunities.

Each of these strategies entails special risks noted on page 9 and at the back of

this paper that an investor should discuss with their advisor.

[ 2 ] I N v e s T I N g F o R A N e W W o R l d

Jry Rnbr

Chie Investment Strategistor Fixed Income

Jerey Rosenberg is BlackRocksChie Investment Strategist orFixed Income. His responsibilitiesinclude working closely with theChie Investment Oicer o FixedIncome, undamental portoliosand team to develop BlackRocksstrategic and tactical views onsector allocation within ixedincome, currencies and commodi-ties. Prior to joining BlackRock, Mr.Rosenberg spent nearly 10 yearsat Bank o America Merrill Lynchas the Chie Credit Strategist. Mr.Rosenberg earned an MS degreein Computational Finance romCarnegie Mellon, a BA degree inMathematics rom the Universityo Minnesota, and a BA degreein Finance rom the University oWisconsin. He has been a CharteredFinancial Analyst since 1997.


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Bn ha pri ab-ara rturn r th pat

ca, what i yur utk r th nt ca?

Its true. While stocks returned almost nothing over the past decade, US bonds returned

6.5%, which is above the 80-year average o 5.5% or the asset class. However, the uture

return proile or bonds will be more challenging, and it is not likely that bonds will

provide similar above-average returns over the next decade. With current yields or the

benchmark 10-year US Treasury bond hovering near its historic low, long-term annual

bond returns will likely be in the 1%-3% zone since returns historically mirror starting

point interest rates. Compounding the challenge or income investors and retirees is

the reality that inlation eats into the returns o any bond yield, meaning that many

portolios o traditional bonds will have negative real (inlation-adjusted) yields. Unlike

the past environment or investing in ixed income, todays low yields mean there is

little cushion to the potential or rising interest rates.

What yu ut intr in thi nirnmnt?

With the golden age o ixed income investing likely a memory, investors should re-think

the construction o their ixed income portolio. In the past, traditional allocations to

ixed income that ocused on benchmark allocations (meaning owning a relatively

static market portolio o ixed income investments) could both generate income while

preserving principal. In todays environment such a strategy will likely ail at achieving

both o these objectives. Today, investors need to oremost consider their priorities

between income and preservation o principal. For income, there are areas o the ixed

income marketplace that still oer more attractive yields that are undamentally

compelling. In particular, I would point to credit related sectors such as high yield,

loating rate loans, and municipal bonds (see Figure 1).

R e C o N s T R U C T Y o U R F I x e d I N C o M e P o R T F o l I o [ 3

Unik th pat nirnmnt

r intin in incm,

tay w yi man

thr i itt cuhin t

th ptntia r riin

intrt rat.

Morningstar, Inc. as of 12/31/11.

8%

7

6

0

High

Yield

Bank

Loans

Emerging

Market Corporates

Securitized

Assets Municipals

Non-US

Dollar

Agency

Mortgages

Inflation

Protected

Treasury/

Agency

Money

Market

YIELD(%)

4

2

5

3

1

FIXED INCOME SECTORS

Long Term AverageCPI = 3%

Source: Bloomberg. As of 3/31/12. The sector yields listed are represented by, respectively: Barclays US High Y ield Index, S&P Leveraged Loan Index, Barclays Global Emerging Markets Index, BarclaysUS Corporate Investment Grade Index, Barclays US Secur itized Index, Barclays US Mortgage Backed Secur ities Index, Barclays Municipal Bond Index, Barclays Global Aggregate ex-USD Index, BarclaysUS Inflation Protected Securitie s Index, Barclays US Treasury Index and Barclays 1-3 Month U.S. Treasury Bill Index. Past performance is no guarantee of future results. It is not possible to invest directly inan index. Note: Trailing twelve-month CPI as of Ma rch 31, 2012 was 2.65%.

Figure 1: Yield Opportunities Can Be Found in Fixed IncomeYi i incm ctr rati t inatin


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Furthermore, alternative ixed income portolio management techniques can be more

eective in this environment. The benchmark style o investing ocuses on replication

o a market portolio dominated by interest rate risk. Shiting ixed income investments

towards a lexible style o investing allows or greater opportunistic investing across

the ixed income universe. Such a strategy increases the chances o success in achieving

the objectives o a core ixed income holding o preservation o principal, income and

diversiication in this new environment or ixed income investing.

Why ar yi w? d yu thm riin?

Yields havent always been so low. Interest rates on bonds were high in the 1970s, but

inlation was out o control and causing pain throughout households and businesses as

the economy struggled. At the end o the 1970s, the Federal Reserve made a bold policy

shit to counter the runaway inlation and bring it down to manageable levels. This new

Fed policy ocused on ighting inlation arguably was the beginning o the 30-year secular

decline in interest rates that has beneited all long-term ixed income investors.

At this point, however, there are persistent structural downward pressures on rates.

Foremost amongst these stands the broad global policy response o unconventional

monetary policy ollowing both the US credit crisis and the current European sovereign

crisis. The extraordinary accommodative policies o the Fed as well as the other major

global central banks have undertaken to prevent delation and mitigate asset price

erosion coming out o these inancial crisis have set the stage or higher levels o inlation,

and rates, in the uture. Contributing to the upward orces on rates is the modestly

improving US economic recovery, which should propel inlation and rates eventually.

Finally, while the situation is luid, eventual conclusion on the status o Greece and the

rest o the periphery in the European sovereign crisis remains a key hurdle to lowering

the current sae-haven status o US government bonds that contributes currently to low

US interest rates. However, the increases in rates over the next year will be mitigated

by the likely continued policy o unconventional monetary policy. Rising rates will be

the longer-term backdrop to investing in ixed income. The shorter-term challenge or

today is how to invest in ixed income when rates are below inlation levels and likely

to remain that way.


Rik cm in many rm.

gin thir rcr w yi,

traitina incm

curiti may w r

nati ra rturn

atr infatin.

Sources: US Treasury, BLS, Morningstar, Inc. Data as of 3/31/12.

12 M. Y Atr Infatin

Infation (US CPI last 12 mo.) N/A -2.65%

Taxable Money Markets 0.02% -2.63%

3-Month CDs 0.29% -2.36%

10-Yr US Treasury Bonds 2.22% -0.43%

Short-Term Bond Mutual Funds 2.08% -0.57%

Government Bond Funds 2.72% 0.07%

Figure 2: Real Returns Are Negative for Many Fixed Income CategoriesRa (inatin-ajut) yi


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shu incm intr an rtir cntinu t ry n

traitina i incm r principa prtctin an incm

inc thy ar a an rik-r?

Preservation o principal should be considered in real terms. That is, you want to

preserve the real purchasing power o your principal. In order to do so, it must grow

at the rate o inlation. Traditional higher quality, sae-haven bonds, as well as a number

o other ixed income securities, pose their own risks in the current environment.

Because their yields today stand below the level o inlation, they will ail to preserve

principal in real terms (see Figure 2). In addition, Treasuries and other higher-quality

interest rate sensitive sectors o ixed income are more exposed to rising interest rates

because they lack actors that help to increase prices when rates do eventually rise.

Whn yu think abut

puttin mny t wrk tay,

th hih yi crprat

bn ctr cntinu t

rprnt an attracti

urc incm.

Sources: Barclays Capital, JP Morgan, Bloomberg. High yield bonds represented by the JP Morgan Global High Y ield Index,investment-grade bonds by the Barclays Capital Aggregate Bond Index, large-cap US stocks by the S&P 500 Index, small-cap USstocks by the Russell 2000 Index, UK stocks by the FTSE 100, German stocks by the DAX Index and US Inflation by the US CPIUrban Consumer MoM SA Index. Past performance is no guarantee of future results. It is not possible to invest directly in an index.

10

8

6

0

ANNUALIZEDRETURNS(%)

4

2

ANNUALIZED VOLATILITY (%)

0 5 10 15 20 25

US Inflation

5-Year Treasury

10-Year Treasury

Investment-

Grade Bonds

UK Stocks

Gold

Large-Cap US StocksSmall-Cap

US Stocks

German Stocks

High YieldBonds

Figure 3: High Yield Attractive Relative to Other Assetssubha: Tta rturn . atiity, 1987-2011

Whr can intr t in incm in thi markt?

High yield corporate bonds represent an attractive source o income today. In todays

inancial markets, global policy makers are looding inancial markets with newly created

currencies. In such an environment, credit deault risks decline as this excess liquidity

helps to orestall deault. That leads to an attractive source o income rom the high

yield corporate bond sector (see Figure 3) as low deault rates means youll keep more o

that income and give less o it back in the orm o deaults. Companies (and countries

as well) deault when they lose access to liquidity. Todays policy environment o global

money printing ensures ample inancial market liquidity that should keep deault

rates low. And todays pricing o high yield means investors continue to be adequately

compensated or that deault risk with a yield above the expected losses rom deaults.

This stands in contrast to Treasury securities in which yields stand below the level o

inlation, thereby guaranteeing a negative return ater inlation.


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There is o course a trade-o to increasing income through high yield in a ixed income

portolio. With greater emphasis on deault risk comes greater sensitivity to equity

markets. Hence, a ixed income portolio with greater high yield exposure will oer less

oset to equity exposures within a portolio context. Clients using ixed income to

balance their equity exposure rather than using ixed income or income should conside

this actor when constructing their overall debt and equity mix o investments.

d hih yi p t much rik r incm intr

an rtir?

That really is a question o investor risk tolerance. And or income investors and retirees

that is a question o the ability to withstand principal losses. Its important to keep

in mind that high yield is the most exposed asset class in ixed income to the credit

cyclethat is the cycle o deault losses in the economy typically (though not always)

associated with the business cycle. During periods o increasing deault losses, high

yield tends to lose principal value and in past cycles these losses can be substantial.

Such historical experience should be kept in mind when sizing the portolio allocation

to high yield. Yes, the asset class oers greater income potential. But such income

comes at a cost o potential uture principal losses. And while one hopes to be able

to shit allocations to avoid these losses, swings in the credit cycle tend to be sudden

and unpredictable making such tactical asset allocation shits diicult to execute in

reality. Hence any allocation to high yield should be careully balanced against this

potential outcome and how the client might react to the realization o principal losses.

Taking risk and valuation into account, we believe high yield is still attractive today in

terms o the income youre getting or the risk youre assuming. High yield would certainly

lose value in the case o a systemic shock or economic downturn, but with yields as

high as they are and deault rates low, we believe investors are well compensated or

current risk in the current environment.

d yu intrt rat rik r crit rik a th ratr rik

t intr prti?

For todays investment environment we see interest rate risk as the greater risk than

credit risk. While US Treasury securities oer saety with regards to deault risk, they

will nevertheless suer principal losses in a rising interest rate environment. In contrast,

high yield would respond less negatively to a rise in rates. At the same time, the high

yield asset class is currently out-yielding 5-year Treasuries by 680 basis points (or 6.8%).

The average high yield bond today is currently oering a yield o nearly 8% versus less

than 1% on a 5-year Treasury. And when you consider that high yield deault rates are

currently running around 2%, that 680-basis-point risk premium over Treasuries tells

us that the market is pricing in a great deal more risk in the asset class than likely

exists (See Figure 4).

Fr tay intmnt

nirnmnt w

intrt rat rik a th

ratr rik than crit

rik. Whi Us Traury

curiti r aty with

rar t aut rik, thy

wi nrth ur

principa in a riin

intrt rat nirnmnt.

Yield to maturit y of Barclays U.S. High Yield Index.


7/12


Yu mntin atin rat an. What r hu thy pay in

a i incm prti?

Floating rate loans typically inance lower rated companies, and oer an interest rate

that loats, or gets reset, on a regular basis based on a benchmark such as LIBOR.

This loating-rate eature makes the loans relatively insensitive to movements in interest

rates. More recently, however, weve seen many more investors incorporate loans

into their portolios to add another layer o diversity to their income streams. Through

loans, theyre able to achieve that diversiication without having to take duration risk

and without giving up current yield. Loans can oer portolio diversiication as they

demonstrate a low correlation to US investment grade-rated bonds and a negative

correlation to US Treasuries over the longer-term. O course, diversiication does

not guarantee a proit or protect against loss in declining markets, but it has been

shown to help manage overall portolio risk. However, the loating rate nature while

protecting a portolio rom rising interest rates does entail the loss o the protection

typically aorded by ixed income when interest rates decline. This characteristic o

loans makes them better suited to portolios seeking stable sources o income rather

than looking or stability in the context o equity portolio exposures.

I i incm crit intin ti cu n crprat

intmnt ra bn, hih yi bn an atin rat an?

Credit investing breaks down broadly into exposures linked to the commercial side othe economy and exposures linked to the consumer side. Investment grade, high yield

and loating rate loans represent the segments o the ixed income universe inancing

corporations. However, the ixed income landscape provides exposures to other orms

o credit risk as well. Asset-backed securities (bonds backed by collateral such as

aircrat, credit card receivables or auto and other consumer loans) is one o the credit

sectors we believe oers good relative value opportunities. Commercial real estate

represents another.

Mr rcnty, w n

many mr intr

incrprat an int

thir prti t a

anthr ayr irity

t thir incm tram.

Source: JP Morgan. Data from 12/1/86 to 2/10/12.

2,000

1,800

1,600

1,4001,200

1,000

800

600

400

200

0

16

14

12

10

8

6

4

2

0

12/89 12/9912/94 12/04 12/09 2/12

AVERAGESPREADO

VERTREASURIES

(BASIS

POINTS

)

Default RateSpread Over Treasuries

T

RAILING12-MONTH

DEFAULTRATE(%)

Figure 4: High Yield Offers Premium and Low Default RateHih yi pra r Us Trauri . traiin aut rat


8/12


Another opportunity rising out o the European debt crisis is the emergence o sovereign

debt as a de acto new credit sector. As you can see (Figure 5), sovereign debt has become

a considerable opportunity or investing. Rather than being treated as a risk-ree asset,

governments now are treated as issuers with credit and deault risk. In act, one o the

interesting opportunities coming out o this situation is that some corporate bonds are

trading as i they have better credit ratings than some countries. That relects the better

debt dynamicslow leverage and rising cash lowsthat corporations currently exhibit.

Volatility in sovereign risk creates risks but also new opportunities.

Any icuin yi

an incm wu b

incmpt i it i nt

incu a icuin

municipa bn.

Source: Barclays Capital. As of 7/29/11. European peripheral sovereigns include index-eligible debt in Portugal, Ireland, Italyand Spain. Asian sovereigns include index-eligible debt in Malaysia, South Korea, Singapore, Taiwan, Thailand and Hong Kong.

US

Europe

Asia

Total

0 2 4 6 8 1210

High YieldInvestment Grade Sovereign

$10.8 Trillion2.91.26.8

$4.9 Trillion1.03.9

$4.6 Trillion

$1.3 Trillion0.80.5

2.10.22.4

Figure 5: Adding International Credits Doubles Opportunity Setsiz ba crit markt in Us ar

What thr i incm ctr hu intr cnir

r a irii prti?As just mentioned, securitized assets present opportunities. These credit-based bonds

are backed by collateral such as aircrat, credit card receivables or auto and other

consumer loans. They also oer a wide variety o risk and yield proiles depending

on investor preerences. For investors seeking relatively lower risk alternatives to

Treasuries, other government-backed securities such as agency mortgages backed

by Ginnie Mae oer slightly higher yields than traditional government bonds, with a

slightly higher risk proile in terms o price risk (volatility) but little deault risk.

O course, any discussion o yield and income would be incomplete i it did not include

a discussion o municipal bonds. Clearly, state and local governments continue to be

iscally challenged, and these challenges have raised the risks or investors in thissector. However, market prices have substantially relected this new environment,

balancing the risks with higher yields making a strong case or investors to consider

municipal bonds or their portolios. Municipal bonds have a history o low volatility,

high quality and competitive yields. However, in todays environment o heightened

municipal where investors increasingly bear that risk directly, new strategies more

ocused on credit risk management will be required to achieve those characteristics

in the uture. Furthermore, municipals tax-exempt status makes their yield more

attractive when comparing it to other ixed income on an ater tax basis. As Figure 6

highlights, municipal bonds on this basis present an attractive opportunity relative to


9/12


corporate bonds. Historically, muni bonds yield less than corporate bonds because o

the tax advantaged income (with similar credit and duration). For example, a 5% return

on a corporate bond (based on this return coming rom income only) would equate to

an equivalent return o 3.25% at a 35% ederal tax rate or a municipal bond.

Finally, the status o this tax exemption represents a potential, even i unlikely risk to

consider. As the US will need to eventually address its long run budget deicit and debtproblem, new sources or increasing tax revenues will be required. That may eventually

include phasing out or even eliminating entirely the tax exempt status o municipals.

However in the same context o raising revenue, higher marginal tax rates increases

the attractiveness o the tax exemption to investors. Hence, uture tax policy uncertainty

represents both a risk and potential beneit to the municipal sector and the likelihood

o either occurring at this point remains hard to determine.

W bi intr hu

cnir incrpratin

irnt prti mana-

mnt apprach r ty

ai rm buy an h.

Th incu trati

uch a n/hrt an

fib incm.

Source: Morningstar as of 12/31/11. Barcap Muni Index Yield divided by Barc ap US Credit Index Yield.

100%

95

60

RATIO(%)

90

85

80

75

70

65

3/80 3/84 3/88 3/92 3/96 3/00 3/04 3/08 3/12

Historically rare to be above 90

Average = 75

3/31/1289%

Figure 6: Municipal Bond Yields at Record Highs vs. Corporate BondsMuni yi ii by Us crprat bn yi

In aitin t ctr, ar thr prti manamnt

trati that intr hu cnir?

Yes. We believe investors should consider incorporating dierent portolio management

approaches or styles that likely work better in todays and tomorrows ixed income

environment. While most investors are amiliar with the concept o investment style

in the equity world such as growth or value, the concept o style investing in ixed

income is new. Thats because or most o the last 30 years there was only one style

rom which to choose: Benchmark.

Benchmark style investing seeks to replicate a market portolio through tracking the

perormance o an index incorporating the investable universe. And over the past 30

years the dominant risk actor determining the perormance o this style o investing

has been declining interest rates. With the prospect o declining interest rates behind

us, the outlook or this style o investing in ixed income appears less capable o replicating

that past perormance going orward.


10/12


Flexible investing allows or greater lexibilityaltering the mix o risks and exposures

in a ixed income portolio irrespective o the weights o the available universe. With

this greater lexibility, this style can better manage ixed income investments in the

current and uture environment.

Hw i a ib i incm traty irnt rm a

traitina bn traty?

The dierence is that most traditional bond portolios are managed and measured

against a benchmark index. Why is this so important? Because a benchmark by its

nature relects speciic allocations across ixed income sectors. I a bond manager is

compelled to replicate that index, eectively the manager owns with only some limited

variability the market portolio. The market portolio simply relects the amount o

debt issued in the economy. In todays economy most o the debt now comes rom

governments. This may be exactly the wrong kind o risk or investors to hold in an

environment o rising inlation or sovereign credit risks.

Casting o benchmark constraints allows an investor to choose the mix o market risk

actors that best achieve the goals o the investment. This lexible style reduces the

orced exposure to government risks allowing or a more advantageous mix o interest

rate risk and credit risk. The lexibility also enables investors to capitalize on the most

compelling opportunities around the globe and across all ixed income sectors. Such

lexibility allows the portolio manager to alter the mix o risk actors in the portolio

over time to best match the risk proile to the investment environment.

Ar thr thr trati in i incm t cnir?

Yes, a long/short strategy should be considered as well. A long/short strategy in

the credit asset class seeks to achieve attractive total returns without reliance on

Intr hu cnir

incrpratin aitina

urc incm

rik an yi, a w a

atrnati prinay

mana trati uch

a fib an n/hrt.

Source: BlackRock. Data as of 3/31/12 as represented by the Lipper Shor t Investment Grade Debt and Lipper IntermediateInvestment Grade Debt category averages. Past performance is no guarantee of future results. Index performance is shown forillustrative purposes only. It is not po ssible to invest directly in an index.

0%

-1

-4

-6

-5

-2

-3

-1.8%

-4.7%

-5.1%

SHORT-TERM

FUNDS

1.8 YEARS

1.93%

INTERMEDIATE-TERM

FUNDS

4.7 YEARS

3.07%

BARCLAYS US AGG

FUNDS

5.1 YEARS

2.01%

DURATION =

YIELD =

Figure 7: A Rise in Interest Rates Hits Long Duration Bonds MostBn pric ct a 1% incra in intrt rat


11/12


interest rates. These strategies can add diversiication to a ixed income portolio as

they accomplish total return goals without reerence to interest rates. They do so by

seeking to identiy attractive long risk opportunities balanced against short (or selling)

positions in unattractively priced securities. By identiying these relative mispricings,

positive total returns can be achieved while limiting the overall market risk exposure

to ixed income.

Long/short investing entails special risks. Short sales in securities that increase in

value can cause a loss o principal. Any loss on short positions may or may not be

oset by investing short sale proceeds in other investments. Investing in derivatives

entails speciic risks relating to liquidity, leverage and credit that may reduce returns

and/or increase volatility.

s t t back t th qutin: s what I with my mny?

First and oremost is to decide on the right mix between principal preservation and income.

In todays low interest rate environment, preservation o principal will be much harder.

And doing it at the same time as achieving income will be even more challenging. Speciic

allocations or each will vary based on an investors goals, risk tolerance and time

horizon, and these considerations should be discussed with an experienced inancial

proessional. However, incorporating additional sources o ixed income risk and yield,

as well as alternative proessionally managed strategies such as lexible and long/

short into an overall ixed income portolio can help enhance the overall success

o an investors entire portolio.

Typical core holdings in ixed income portolios rely heavily on duration and interest rate

risk. While such strategies have been successul in the past when interest rates were

steadily declining, they are less successul in stable to rising interest rate environments,

arguably the environment o today and tomorrow. Flexible strategies should occupy a

greater share o this core ixed income category.

And or clients looking to ixed income primarily or income, todays low yield environment

requires a greater degree o risk taking. In todays low deault risk environment, we

avor adding credit risk segments o ixed income to achieve higher levels o income

than can be achieved in risk-ree segments. This includes high yield and high grade

corporate bonds, loating rate loans and municipals. The precise mix o investments

depends on an investors tradeos between need or income and tolerance o potential

principal loss as well as their tax situation. Additionally, another important consideration

is the degree to which the ixed income portolio is used to oset equity portolio

exposures. Higher credit risk allocations in ixed income can meet investors higher

income needs, but raises the degree o correlation to the equity portion o the portolio.

At its most basic level, ixed income should provide preservation o principal or the most

risk-averse investors. But with global central bank monetary policy inluencing the level

o interest rates to be below the level o inlation, preservation o principal in real,

ater-inlation terms requires some degree o risk taking even or the most conservative o

investors. Here we avor inlation protected strategies including an allocation to TIPS

that replaces nominal Treasury exposures in the portolio and short duration strategies

that take modest amounts o risk to achieve a yield commensurate with inlation.


12/12

Not FDIC Insured May Lose Value No Bank Guarantee

No investment is risk free. International investing involves additional risks, including risks related to foreign currency, limited liquidity,

less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments.Commercial banks and other financial institutions or institutional investors make corporate loans to companies that need capital to

grow or restructure. Borrowers generally pay interest on corporate loans at rates that change in response to changes in market interestrates such as the London Interbank Offered Rate (LIBOR) or the prime rates of US banks. As a result, the value of corporate loaninvestments is generally less exposed to the adverse effects of shifts in market interest rates than investments that pay a fixed rateof interest. The corporate loans are usually rated below investment grade. The market for corporate loans may be subject to irregulartrading activity, wide bid/ask spreads and extended trade settlement periods. Investments in non-investment-grade debt securities(high-yield or junk bonds) may be subject to greater market fluctuations and risk of default or loss of income and principal thansecurities in higher rating categories. Investing in derivatives entails specific risks relating to liquidity, leverage and credit that mayreduce returns and/or increase volatility. There may be less information available on the financial condition of issuers of municipalsecurities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the incomemay be taxable. Some investors may be subject to Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable.

The opinions presented are as of May 2012, and may change as subsequent conditions vary. Individual portfolio managers for BlackRockmay have opinions and/or make investment decisions that, in certain respects, may not be consistent with the information containedin this report. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation,offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information and opinions contained in this materiaare derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and arenot guaranteed as to accuracy. Past performance does not guarantee future results. There is no guarantee that any forecasts made willcome to pass. Reliance upon information in this material is at the sole discretion of the reader.

FOR MORE INFORMATION: www.blackrock.com

2012 BlackRock, Inc. All Rights Reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, SO WHAT DO I DO WITH MY MONEYand INvESTINg fOR A NEW WORLD are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in t he United Statesand elsewhere. All other trademarks are those of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.

Lit. No. NEWWORLD-FI-0412 AC6137-0612 / USR-0217

Wh I BackRck?

In a wr that i hitin an chanin atr than r br, intr wh want anwr that unck pprtunity an

uncr rik ntrut thir at t BackRck. A an inpnnt, ba intmnt manar, BackRck ha n ratr

rpnibiity than t it cint.

It why many th wr art pnin un an inuranc cmpani trut BackRck t unrtan thir uniqu

bjcti an why inancia air an iniiua n intr partnr with BackRck t hp thm bui th mrynamic, ir prti th tim rquir.

BackRck ha buit it rin arun it cint ratt n: priin brath capabiitian pth knw

acr acti an pai trati. Thi i cmbin with a inuar cu n irin trn, cnitnt prrmanc

an an abiity t k acr at ca, raphi an intmnt trati t in th riht utin.

With p rt in ry rin acr th b, m 100 intmnt tam in 27 cuntri har thir bt thinkin t

ain th iniht that can chan utcm. An, with a pain t unrtan rik in a it rm, BackRck 1,000+

rik prina i p t in th numbr bhin th numbr an brin carity t th mt auntin inancia

chan. That hap an trnthn th intmnt ciin that BackRckan it cintar makin t

ir bttr, mr cnitnt rturn thruh tim.

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