The foundation of successful fixed income investing has always been a consistent process of “making a little bit of money a lot of times” according to BlackRock, manager of over US$3 trillion dollars in fixed income. Its recent quarterly report on capturing alpha centres on identifying and winning during critical pivot points in the market — those moments where tactical, informed decisions yield disproportionate returns over time.
Today, the global economic landscape presents three interconnected pivot points demanding a selective, active approach: the disruptive power of AI, the fundamental shift in U.S. monetary policy and the desynchronization of global growth.
A new information edge
Disruptive technologies, especially AI, aren’t only transforming the labour market. They are revolutionizing the investment process itself. AI tools are cost-cutting, productivity-boosting machines, helping companies navigate declining sales growth and improving operating efficiency.
In a world of information abundance, the investment edge has shifted from merely collecting the dots, to connecting the dots between traditional and alternative data sources.
Declining survey response rates mean official economic data is often subject to sharp revisions. Alternative data, such as real-time tracking of online job postings or geotagging purchases for supply chain analysis can provide a clearer and timelier view of macro shifts.
For example, alternative data provided clear signals of a slowdown in U.S. wage growth and a labour market easing well before official figures were revised downward. An integrated, forward-looking data strategy proved its value.
Monetary policy sea change
The most critical pivot point involves evolving U.S. monetary policy and its interaction with the labour market and technological change.
While aggregate U.S. economic growth appears solid, this masks a significant level of stress beneath the surface. Resilient segments — BlackRock is talking about corporations and wealthier households with ample assets and cashflow — are insulated from high interest rates. However, the lower 50% of earners are stressed.
They carry substantial non-mortgage debt, face weaker wage growth and don’t benefit from higher asset prices or returns on cash. This segment may represent a smaller share of overall spending, but the rising social imbalance is a risk that must be actively monitored.
To support a softening labour market and address structural challenges in interest-rate sensitive sectors like housing, the U.S. Federal Reserve is already cutting policy rates and is likely to continue in the months ahead. The medium-term challenge for the Fed is managing anaemic job growth due to productivity gains from disruptive technologies, particularly AI.
BlackRock’s report suggests the next decade of interest rate policy could see the central bank struggling to elevate employment, a reversal from the pre-Covid era’s struggle to elevate inflation.
Given the likelihood of rates declining from current levels, some exposure to the back-end of the yield curve makes sense. However, the report’s preference is to own the bulk of duration exposure in the front of the yield curve. This dampens volatility and helps generate income in a portfolio.
Global divergence
The global economy is no longer marching in lockstep. Inflation, growth and fiscal/monetary policies are diverging between the U.S., Europe and Asia and are creating diversification opportunities outside of the dominant U.S. fixed income market.
BlackRock argues Asian bonds are currently underrepresented in global portfolios. With the correlation between major Asian and U.S. bond indices flipping to negative, Asian bonds become a powerful, uncorrelated asset for portfolio resilience.
This divergence is fuelled by an expected “Japanification,” according to the report, of Asia ex-Japan, where manufacturing capacity outstrips domestic demand. U.S. tariff policy is anticipated to be inflationary in the U.S. but deflationary in Asia.
This is giving Asian central banks, such as in the Philippines and Singapore, scope to reduce interest rates. Meanwhile, countries like India and Indonesia offer real yields around 3% (e.g., 6% yield with 3% inflation), providing a margin of safety.
However, Asian markets are smaller and less liquid than the U.S. Treasury market. BlackRock stresses that a successful strategy requires active management rooted in strong local knowledge to stitch together smaller regional wins into a meaningful allocation.
Then there is Europe
The most compelling case for diversification is in European fixed income. With yields near the historically high 3% level, fixed income remains attractive for income-oriented investors. This is supported by inflation expectations aligning with the European Central Bank’s 2% target.
But be warned, the market appears to be “priced for perfection.” Tight credit spreads mean any adverse news — from geopolitics to fiscal headwinds — could trigger outsized reactions.
BlackRock thinks that the investment focus must shift from chasing beta to alpha generation through sector allocation and security selection. Investors should prioritize companies with strong balance sheets capable of weathering volatility, rather than stretching for yield in fragile areas.
The report favours high-quality collateralized loan obligations as an example, for their spread premium and low correlation to traditional fixed income.
Within sovereign bonds, volatility from political instability in France and diverging north-south growth outlooks, is creating opportunities for investors to lock in yields without corporate credit risk. As far as European government bonds are concerned, clipping yields at the front end of the curve is what they favour, but the significant curve steepening warrants a close eye on longer-dated assets.
BlackRock’s overall outlook is clear: the current environment offers limited upside for capital appreciation but significant opportunity for income generation and alpha.
A static, yield-chasing approach won’t work. Moving away from broad beta bets to a nimble, selective approach that has attractive income is key. Relying on fundamental and credit research to avoid pitfalls in tightly priced markets, especially in Europe, also applies. And finally, the asset manager advocates acting decisively to size positions when volatility, mispricings or idiosyncratic shocks open windows of opportunity.
By balancing income with agility, BlackRock believes investors can win during this desynchronized, technologically-driven market landscape.
Pat Bolland is head of advisor recruitment at Justwealth Advisor Services