SYSTEMATIC FIXED INCOME OUTLOOK

Five Wild Cards for 2021

BlackRock’s Systematic Fixed Income experts examine the five “wild cards” that may determine the direction of markets in 2021, the outlook for alpha opportunities, and the new challenges facing traditional 60/40 portfolios.

2020 did not play by the typical rules that govern financial markets. Instead of the ebb and flow of the economic cycles we have become accustomed to, a global public health crisis forced activity to a standstill, sparking a sudden and deep economic crisis.

Global governments, in an effort to triage the situation, took drastic measures to restart the catatonic state of economic activity through massive fiscal and monetary policy actions.

Now with global economies returning to health, markets must grapple with navigating the shape of the recovery in 2021 and the potential long-term side effects that the emergency treatment steps will have on financial markets and portfolio construction.

H1 2021 | Systematic Fixed Income | Market Outlook

ContentsFive wild cards for 2021 2-5

Outlook for alpha potential 6-7

Portfolio construction ideas 8

Vaccinations – Breaking bad (or good)?Are lofty valuations and low volatility too optimistic given the timeline for a full vaccination roll out?

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2 Fiscal Policy – Brave new world?Will fiscal policy meet the market’s high expectations or will unintended consequences undermine market enthusiasm?

3 Monetary Policy – Taper Tantrum II?Can central banks carefully pull back on the unprecedented level of support or is another Taper Tantrum in the cards?

4 Government Debt - How much is too much?Will ballooning government debts matter to markets?

5 Inflation – Is it time to get real about inflation?Will massive stimulus overheat the economy?

Five wild cards for 2021

Tom ParkerChief Investment OfficerSystematic Fixed Income

Jeffrey RosenbergSr. Portfolio ManagerSystematic Fixed Income

Reviewing 2020’s wild cardsThe global pandemic upended every investor's playbook in 2020. However, three of the five wild cards from our 2020 Outlook were largely accurate. Our “Politics” wild card ended up mattering quite a lot as we now see potentially seismic fiscal policy changes as a direct result of the recent U.S. elections. “Valuations” and “Vulnerabilities” showed to be a key factor in early 2020. The high valuations and the reach-for-yield behavior of fixed income investors we noted were shown to be risks that exacerbated the pain felt during March’s sell-off.

Some of our other wild cards proved less impactful. “Trade” frictions with China faded to the background. “Monetary Policy” was directionally correct, as we expected it to be skewed to the accommodative in the event of a downside shock. However, in light of the pandemic that has turned out to be an understatement.

BlackRock.com/SFIOutlook

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VaccinationsBreaking bad (or good)?The approval of multiple COVID vaccines was a key driver of markets in the last quarter of 2020 as their eventual rollout provides a light at the end of the tunnel for the global health crisis. However, in 2021, the pace of the global vaccine rollout will determine just how long that dark tunnel will be.

Figure 1 demonstrates the effects that lockdowns have had on the shape and pace of economic recovery in the U.S. At the time, market consensus debated between a “V” and “U” shaped recovery back in April 2020. However, with greater clarity on the differentiated toll COVID has wrought across society, a “K” shaped recovery—where some segments/populations have recovered while others have not—now appears the best “letter” to summarize the recovery so far.

Figure 1 highlights one measurement of this differential economic impact from COVID. This shows the year over year % change in employment based on educational attainment. Non-college educated workers suffered both larger job losses and have recovered less of those job losses. This follows as more service sector workers fall into this category and COVID shutdowns constrained this activity the most.

Figure 1: The “K” shaped recoveryChange in U.S. employment by education level

2021: Moving from crisis management to recovery2020 was an unusual year by any metric. After the fastest bear market in history in March of 2020 with the CBOE VIX Index rocketing above 80 points, the S&P 500 and MSCI ACWI Indices finished the year +18.4% and +16.3%, respectively. Corporate fixed income markets followed a similar pattern with spreads widening dramatically early in 2020, and tightening to finish the year at pre-COVID levels. The U.S. 10-Year Treasury yield plunged below 1.0% for the first time in history and there is now over $18 trillion in negative yielding bonds globally.

Underlying these seismic fluctuations in asset values was a number of factors including a global pandemic, unprecedented fiscal and monetary policy actions by global governments to prop up economies, and the surprisingly fast approvals of COVID vaccines. For 2021, the focus turns from navigating a crisis, to accelerating an economic recovery in a (hopefully) post-COVID world. We now highlight the “wild cards” that are key to a recovery.

Figure 2: The COVID (volatility) vanishing actEquity, interest rate, and credit spread volatility

Source: Bloomberg, as of January 2021. Equity, rate, and credit volatility measured by the CBOE VIX Index, Merrill Lynch MOVE Index, and ICE BofA HY OAS Index, respectively.

The virus and vaccine outlook will dictate the course of financial market returns as much as it dictates our lives. Despite disappointing vaccine distribution progress so far, realistic estimates of a rollout point to less virus deaths and hospitalizations that will allow for a gradual return to normal life. This return will likely result in a bounce in consumption and activity due to pent up demand. At the same time, Biden’s potentially multi-trillion stimulus plan has economists revising GDP estimates up for 2021-22.

However, with equity valuations near historical highs and credit spreads tight, much of the anticipated economic benefits of vaccinations may be priced in already. Figure 2 highlights this point through looking at market uncertainty measures. Currently, markets appear unconcerned, as volatility has largely vanished even though the virus has not. While equity volatility is still elevated relative to pre-COVID levels, both rate and credit volatility have reached pre-COVID lows—albeit with some surprise bursts at the end of February. In the near-term, optimistic expectations of a reacceleration in economic activity must grapple with a long rebuilding process and risks of new virus variants.

Given these headwinds to an economic recovery, coupled with the tight levels of risk compensation and low measures of fear, investors may come to question their current risk-on positioning. This is not our base case, but it represents a clear, though not imminent, downside risk.

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Fiscal PolicyBrave new world?Global governments jumped into action in 2020 by injecting historic levels of fiscal stimulus into their economies (Figure 3). The U.S. passed over $3 trillion in economic stimulus bills that included direct payments to taxpayers, expanded unemployment benefits, short-term small business loans, as well as other supportive measures. Similarly, Euro area countries announced a wide variety of supportive fiscal measures including VAT cuts, temporary staff furlough measures, tax deferrals, and guarantees for firms. The result was a partial snap-back in economic activity in a matter of months.

In 2021, a renewed hope for more fiscal support around the world is boosting expectations for growth. Yet, fiscal policy means more than debt-financed spending and COVID aid—it also includes regulatory, tax and environmental policies. Whether the eventual policies implemented have the same positive market impacts remains unclear. What is clear is that today, markets are looking to fiscal rather than monetary policy for more immediate and substantial market relief. Given the larger political dependencies of fiscal policy, that means a larger contribution to market uncertainty from political dynamics and relatively less from monetary authorities.

But its not just fiscal policy in the U.S. or developed markets that matters for the global outlook. China is a key, but often overlooked, independent player in policy decisions that have global ramifications. China’s credit policy stands as a mixture of fiscal and monetary policy, and because China has a fundamentally different economic governance model, its government has greater control over lending conditions in the economy. As a result, China’s government has exercised a unique counter-cyclical credit policy.

Figure 3: Brave new world of fiscal policy?Fiscal policy impulse: G3 plus China

Figure 4 highlights one measurement of that policy called the China credit impulse. This measures the impact of new lending increments across a broad range of lending categories to growth of GDP.

Figure 4 demonstrates this unique policy in action. As you can see, China’s credit policy easing appears to ramp up strongly in response to worsening global financial conditions, reflected here by rising U.S. high yield spreads. Worsening financial conditions (wider high yield spreads) are typically followed up with a expansionary response in the China credit impulse which appears to significantly contribute to the easing of those poor conditions. After the conditions have recovered, there is a decrease in the China credit impulse, completing the cycle.

China’s credit impulse is a significant driver of the global economic cycle—especially in manufacturing and commodities. With China in a different stage of recovery from COVID than the rest of the world, its credit policy in 2021 may be a major point of contrast to developed markets. Compared to the full-tilt expansionary direction that developed market economies have taken, China appears to be the first global player primed for a policy pull back. This may directly impact sectors or players that have been historically sensitive to China’s credit demand—typically commodity and commodity-related industries, commodity producing EM countries, and overall trade. However, relative to this historical experience, the Chinese economy itself has rebalanced towards more domestic consumption, potentially dampening the outward impact of swings in its credit cycle.

The evolution of Chinese fiscal policy, and its potential to move counter to developed markets, stands as another dimension of the fiscal policy wild card for 2021’s outlook.

Figure 4: Tale of two credit cyclesChina credit impulse and HY credit spreads

Source: Bloomberg, as of February 2021.

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Monetary PolicyTaper Tantrum II?2020 was also a year of rewriting the rule (and record) book for the Fed in terms of monetary policy and growing balance sheets. In the U.S., the Fed swiftly took a series of emergency actions to address liquidity concerns and acted as a backstop against virus-induced financial carnage.

It began operations to support almost every aspect of the fixed income markets such as purchasing Treasuries, Agency MBS, investment grade bonds, and even high yield bonds. 2020 also saw a return to a zero-interest-rate-policy environment in the U.S. and the expansion of negative yielding global developed market government bonds.

Central banks today purchase most of the net government debt issuance, helping to hold down the interest rate costs governments face. In the U.S., significant fiscal policy support has reduced the need for direct monetary support to the economy. In Figure 5, we can see that the Fed is aggressively buying up Treasuries, accounting for more than all of the long term Treasury issuance.

However, a shift in policy away from current expectations (or merely the public discussion of a shift) can have serious ramifications for fixed income markets. Such was the lesson they learned after the 2013 Taper Tantrum.

How and when the Fed can pull back from that support without creating uncertainty or materially shocking interest rates will be one of the key communication challenges for them in 2021 and beyond.

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Source: Refinitiv Datastream, as of January 2021. Fed purchases calculated as the 12-month change in Treasury holdings.

Figure 5: Taper Tantrum II?U.S. Treasury issuance vs. Fed purchases

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Government DebtHow much is too much?The fiscal boost provided by government spending is funded through debt, and 2020 was an expensive year. U.S. government debt held by the public increased by $4.2 trillion in 2020—the largest annual dollar increase in history. Similarly, total U.S. government debt obligations now stand at around $27 trillion, over 100% of GDP—the highest level since World War II (Figure 6). Will it matter to markets? In the short run, not likely, but the impact over the long run will hold significant portfolio consequences.

We have argued previously that fighting COVID is like fighting a war because the U.S. has resorted to war time finance techniques to finance the effort. Those tactics included implicit and explicit government control over interest rates and policies explicitly geared towards increasing nominal GDP through increasing inflation. The combination of higher nominal GDP while restraining the interest costs to government debt can help restore debt sustainability, but it comes at the cost of significant wealth transference between debtors and savers.

While the debt wild card may not have a sudden or immediate impact on the direction of markets in 2021, there are significant long-term implications.

The pursuit of such policies implies a very different outlook for returns on the safest of assets like cash and government debt. Negative post-inflation returns help to paydown debt by effectively transferring wealth from lenders to borrowers. For example, in this scenario the interest paid to the lender for the debt borrowed is less than the inflation rate, thus the borrower is actually delivering a negative return to the lender when considering inflation.

For fixed income investors, they may opt to avoid this arrangement by carefully choosing how they manage their liquidity reserves and bond portfolios to avoid securities that pay negative interest after adjusting for inflation.

Figure 6: How much is too much?U.S. debt held by the public

Source: Congressional Budget Office, as of December 2020.

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Inflation Is it time to get real about inflation risk?In the U.S., the specter of a higher inflation regime seems to be a market risk that never fully comes out from under the bed to scare investors. However, as it stands now, the 10-year market break even inflation expectation is over 2% (Figure 7). In the spring of 2021, we will likely see a surge in inflation figures, but that will be due to the collapse in inflation during last year’s shutdowns—creating a mirage due to the low base of the calculation. Markets should look through this. Yet, there are a number of factors that appear to be aligning that may finally combine to break the state of persistent muted inflation.

First off, there is the Fed’s new strategy to seek higher levels of inflation by operationalizing its shift to Flexible Average Inflation Targeting (FAIT). Under FAIT, the Fed will now target a 2% inflation on average over time, as opposed to preemptively fighting inflation as it pops up. Since the Fed has undershot their inflation target of 2% over the last decade, they now are going to attempt to overshoot the 2% goal.

And while the Fed has a dual mandate to balance inflation against full employment, they have clearly emphasized that full employment remains paramount. In the short-term this may help to boost the recovery efforts, but it may be problematic eventually.

Prominent former policy makers have raised concerns over being too aggressive with fiscal stimulus. Former Treasury Secretary Larry Summers and Former Senator Phil Gramm have highlighted that disproportionally sized stimulus that is greater than the actual economic loss caused by COVID could overheat the economy, causing greater risk of inflation.

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Figure 7: Great expectations10-Year U.S. Treasury yield, breakeven inflation & real yield

Figure 8: Overcooking the economy?Cumulative loss in GDP from shocks vs fiscal response

Source: BlackRock Investment Institute and IMF, using data from Haver Analytics, January 2021. Note: Orange bars show the discretionary fiscal boost following the GFC and COVID shocks. The GFC measure is captured by the change in the cyclically adjusted budget deficit in 2008 and 2009 calculated by the IMF, and for the COVID shock we use broker estimates of discretionary fiscal measures explicitly introduced in response to COVID for 2020-21. The yellow bars show total government borrowing in the two years following each shock, 2008-09 for the GFC and 2020-21 for the COVID shock using estimates from the IMF World Economic Outlook, October 2020. The pink bars show the cumulative loss in GDP vs a pre-shock trend.

Furthermore, as Summers highlights, the current flat Phillips curve environment—whereby increasing employment does not result in increases in inflation—is a double edge sword. The flip side of a flat curve is that you need a lot of increases in unemployment to reign in future inflation—an unpopular trade-off the Fed would likely want to avoid at all costs.

Figure 8 compares the cumulative loss in GDP and the total fiscal support provided by the government in response to the Global Financial Crisis and the COVID shock so far (assuming a ~$1.9 trillion Biden package). As you can see, the fiscal response to the GFC was not equally sized with the economic loss—probably resulting in the slow economic recovery that followed. In contrast, the fiscal response to COVID has been much greater relative to the loss of GDP. While this could help speed a recovery short-term, the long-term effects are unknown.

This excess stimulus, coupled with an eventual reopening of the economy and more discretionary spending by the general population, may start to have real implications on inflation expectations.

However, secular forces such as a surge in global savings, coupled with persistent trends towards disinflation in the cost of goods from globalization and technology, may temper any significant increases in inflation.

Headwinds aside, the Fed’s change in strategy, massive fiscal and monetary policies, and pent up demand in consumption due to shutdowns may lead to a greater likelihood of overheating. As a result, the risk of higher inflation may become more real than in years past.

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Micro dispersionDispersion can be thought of as the difference in returns across companies. Micro forms of dispersion exploit idiosyncratic return differences across individual bond and equity securities. High dispersion implies a wide difference between winners and losers, while low dispersion implies a narrow difference between winners and losers. One effective way to take advantage of dispersion is in market neutral long/short strategies. These types of strategies try to capitalize on high levels of dispersion by going long companies who might become winners and going short companies that may become losers.

Figure 9 highlights an important feature about dispersion among equities (yellow line) in that it has historically been highest when markets are most volatile (green area). Furthermore, we can see the historic impact the COVID crisis had on dispersion among companies within the S&P 500 (yellow line). March and April 2020 saw a spike in dispersion—implying a higher degree of alpha potential even though overall market volatility skyrocketed.

Since that time, we have seen a trend back to the more historical levels of dispersion as market volatility has subsided. However, although the progress against the vaccine has narrowed those measures, we still see our dispersion measures towards the higher end of the pre-COVID range.

The orange line in Figure 9 also highlights a very important attribute about the interaction of dispersion and capital structure. It shows that over a long time period, a universe of levered companies, or those with debt on the balance sheet, tend to have higher levels of dispersion versus a standard universe like the S&P 500. This higher level of dispersion among levered companies can become even greater when markets are volatile, as demonstrated by the large spike in the orange line during the COVID crisis. Leverage acts as an amplifier—which can be either good or bad at times—that heightens the level of dispersion in equity returns. This insight may lead to better security selection opportunities for investment strategies focused on levered companies.

Figure 9: Dispersion levels are elevated during volatility, especially among levered companies Return dispersion of S&P 500 vs. highly levered companies

Source: BlackRock, CBOE, S&P Indices, Bloomberg, as of February 2021. “Highly levered companies” represented by the top decile of companies in the Russell 1000 Index based on their level of leverage.

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Outlook for alpha potentialTapping into market “dispersion” not direction

Our five key “wild cards” summarize some of the factors that will determine the overall direction of markets in 2021. We now pivot to the outlook for “alpha.” While factors affecting direction characterize the outlook for beta, dispersion, or the difference in specific returns across securities or markets, characterizes the outlook for alpha.

It should be noted that forecasting the environment for dispersion is extremely difficult, as it can change rapidly even if the overall direction of the market does not. Recently, we have seen enormous swings in measures of dispersion. Examples include the historic moves in high versus low momentum stocks following the vaccine announcements in the winter of 2020 and the meteoric rise of retail-driven names like GameStop and AMC Theaters in early 2021.

Knowing this, we now highlight our view of alpha potential as measured by our micro and macro dispersion indicators. Across both micro and macro measures, policy intervention and historic amounts of central bank liquidity have had a profound impact on market dispersion. Today, a potential pullback in central bank liquidity stands as the greatest wildcard that will determine the level of dispersion in 2021.

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Macro dispersionMacro dispersion can be thought of as the difference in specific returns across entire markets that should be priced similarly. Macro forms of dispersion, like micro forms of dispersion, are independent from overall market direction, and thus can act as another source of alpha returns in a portfolio. Macro-centric alpha strategies seek to generate returns by exploiting market neutral country, curve and policy opportunities that may arise due to widening macro dispersion.

Figure 10 highlights our macro dispersion measure over the past decade for global interest rates and yield curves. The larger the band, the greater the macro dispersion in that given market—and the greater potential for alpha opportunities.

Looking at our macro measures of dispersion, we see a mixed picture of opportunities between developed markets (DM) and emerging markets (EM). While the dispersion measures have clearly come off their peak of the COVID crisis in March 2020, we can see some key trends continuing.

Namely, the massive accommodation policies of DM central banks are suppressing dispersion in DM rates (orange band) and DM policy expectations (pink band).

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Figure 10: COVID has increased macro dispersion between DM and EM marketsDispersion across different interest rate markets

Source: BlackRock, Bloomberg, as of February 2021.

However, even with dispersion at such low levels, we would expect it to see a rebound if the market begins to debate a possible tapering or reduction in these policies. In such a case, we may realize more potential alpha opportunities in this segment of our macro measures.

In contrast, we can see that the COVID crisis led to an increase in dispersion across the EM space. The dispersion of EM interest rates (yellow band) and EM policy rate expectations (purple band) increased significantly during the onset of COVID. However, unlike the DM measures, these levels have remained relatively elevated—potentially signaling a less globally synchronized macro environment than in years past.

Importantly, the high levels of dispersion in EM rates markets, and the widening divergences between DM and EM spaces, provide a broader opportunity set for macro-oriented strategies in 2021.

Tapping into greater levels of macro dispersion through an investment strategy may provide another source of return and an additional form of diversification to investors when building portfolios for the post-COVID world. Admittedly, as we stated before, forecasting future dispersion is hard. 2020 however highlights that dispersion tends to increase during periods of high market stress. Thus, strategies focused on exploiting that dispersion have a better opportunity to deliver diversifying sources of returns when they are most needed.

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The 60/40 challengeInvestors have become used to the role of fixed income in the traditional 60/40 portfolio construction framework. The fixed income environment over the past 40 years was highly advantageous to portfolio construction. You basically received a diversifying asset in your portfolio that balanced out your equity risk. And that equity hedge was advantageous to hold as a standalone asset as well.

Nominal interest rates, real interest rates, and inflation risk premia were all significantly higher than today’s levels. All these forces acted as tailwinds for fixed income returns. These combined factors resulted in fixed income offering high levels of income, even after adjusting for realized inflation. At the same time, expectations for economic downturns were met with expectations that Central banks were going to cut interest rates aggressively. The result was a rally in bond prices due to lower future interest rates, which would offset the declining values of equity securities.

But today, it’s a very different environment. All those tailwinds have weakened substantially. Nominal interest rates are extremely low, real interest rates are negative, and expectations for inflation premia are muted. And while short-term interest rates were low during the Global Financial Crisis, the difference today is that long-term interest rates are also low—the 10- and 30-year U.S. Treasury yields are near 1.5% and 2.3% respectively.

If you look at the long-term history of recessions in Figure 11, we find that the 10-year U.S. Treasury yield drops about 300 basis points on average. Are bonds yields still likely to decline in the face of a recession or uncertainty? Yes, but they don’t have the same room to decline compared to previous periods. While the stock/bond negative correlation relationship still exists, what has changed is that the beta, or strength, of that relationship has diminished.

But by how much? We recently ran an analysis to find the level of beta between the weekly return of the S&P 500 Index and the weekly change in yield of the 10-year U.S. Treasury from the period pre-COVID versus the period since COVID. We found the beta of the relationship to be about half of what it was before, with a beta of 1.8 pre-COVID and only 0.9 since COVID. Thus, one would expect Treasury prices to rise at only half the rate they had before when equities sell off. If this holds, the degree of ballast that fixed income can offer is likely to be less than historical averages.

Thinking beyond 60/40 In such an environment, investors may need to rethink their current asset allocations. Alternative investment approaches such as those that seek to generate returns by taking advantage of dispersion may provide investors with alternative forms of diversification if bond ballast alone is not sufficient.

Source: BlackRock, Bloomberg, as of February 2021. U.S. recession periods are defined by National Bureau of Economic Research. Graph displays U.S. 10-year Treasury yield rate changes during recession periods. 10-year Treasury change reflects the biggest move seen from as early as six months before the recession period.

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Portfolio construction ideasRethinking portfolio construction in a post-COVID world

The long-term outlook for a protracted period of zero interest rate policy with relatively low long-term interest rates means fixed income markets may offer both lower returns and less equity diversification potential than before. The risk of accelerating inflation adds another complication to the problem.

Together, these forces pose unique challenges to the traditional 60/40 portfolio. The loss of bond ballast, or the ability for bonds to offset equities in downturns, is an unfortunate side effect of global governments keeping rates relatively low for the foreseeable future.

Figure 11: Bonds may no longer be as effective as a shock absorber to equitiesU.S. 10-year Treasury yield changes during recessions

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ConclusionFor markets in 2021, the investment outlook turns from the crisis management mindset of 2020, to positioning portfolios for a global economic recovery. While there are a number of outstanding factors that will weigh on the outlook for financial markets—such as vaccination rates, fiscal and monetary policy changes, government debt loads, and inflation expectations—there is reason to be optimistic as we can see a glimmer of light at the end of the tunnel.

Similarly, the outlook for alpha, or the ability to seek incremental returns from micro and macro forms of dispersion, appears more elevated than the levels we saw pre-COVID.

Want to explore more?View the latest insights at BlackRock.com/SFI

This material is prepared by BlackRock and 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 opinions expressed are as of February 2021 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this material is at the sole discretion of the reader. This material is intended for information purposes only and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.

Stock and bond values fluctuate in price so the value of your investment can go down depending upon market conditions. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. The principal on mortgage- or asset-backed securities may be prepaid at any time, which will reduce the yield and market value of these securities. Obligations of US Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the US Government. Investments in non-investment-grade debt securities (“high-yield bonds” or “junk bonds”) may be subject to greater market fluctuations and risk of default or loss of income and principal than securities in higher rating categories. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax.

Index performance is shown for illustrative purposes only. Indexes are unmanaged and one cannot invest directly in an index.Investing involves risk, including possible loss of principal.

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Outside of the immediate investment implications of a recovery from the COVID-induced slowdown, there are likely long-term and material challenges to the traditional 60/40 portfolio going forward. Fixed income likely offers less return, and with little room for rates to fall further, less ballast against equity declines.

Today’s portfolios may require alternative approaches to investing that tap into market dispersion (not market direction) to seek returns in order to fill the gap left behind by weakening bond ballast.

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