BlackRock WS International Bond (PWA0825AU) Report & Performance

The Fund’s headline duration underweight was increased

significantly over the month. Compositionally, we rotated our tactical overweight exposure to US duration to an overall underweight and modestly reduced our underweight exposure to Japan duration. We also reduced our underweight to the eurozone area – where we trimmed our underweight to Germany and maintained our underweight to Italy and France. We also maintained some offsetting overweight exposure to Austria and Greece.

• In developed market currencies, we initiated a modest long position in the Norwegian krone, as well as adding to our long positions in the US dollar and the Swiss franc. We also initiated a short position in the euro, as well as trimming our short position in sterling and increasing our short position in the Japanese yen. In addition, we maintained our short Canadian dollar, Australian dollar and Swedish Krona positions.

• We increased our overall credit exposure in spread assets, via an increase in securitized assets – where we added exposure to asset-backed securities (ABS) and commercial mortgage-backed securities (CMBS) in the US. We also increased our overweight exposure to emerging market hard currency debt.

Furthermore, we reduced our overweight exposure to investment grade industrials over the month. We also retain our overweight exposure to investment grade financials and underweight exposure to investment grade utilities. • Within emerging markets, we retain our overweight to select local markets – namely Brazil, South Africa and Mexico local rates. Within currencies, we initiated a modest short position in the Mexican peso. We also added to our short Chinese renminbi position, as well as retaining our short Indonesian rupiah, South African rand and South Korean won positions, alongside our long position in the Singaporean dollar.

Over the month of May, the market focused on the Federal Reserve’s projected hiking path and the continuing tensions between Russia and Ukraine. Equity risk assets saw some reprieve as the S&P 500 managed to bounce by almost 6% in the final week of the month after 7 consecutive weeks of declines. Bond markets also managed to stage a moderate pullback in yields, with 10- year and 2-year nominal rates declining about 9bps and 16 bps respectively.

At the beginning of the month, The Federal Open Market Committee (FOMC) raised its policy interest rate by 50bps to start the path of normalization. In addition, the committee anticipates “ongoing increases in the target range will be appropriate” and announced the start of balance sheet runoff. As previously suggested by the March minutes, the pace of runoff was confirmed today as $95 billion/month ($60 billion in U.S. Treasuries and $35 billion in Agency mortgagebacked securities), with a three-month phase-in period. The committee will continue to remain Focused on fighting inflation and preventing higher inflation from getting entrenched as the labor market is now extremely tight.

The Fund’s headline duration underweight was increased over the month. Compositionally, we reduced our underweight to US and eurozone duration, as well as initiated an underweight to UK and Japan duration. Within the eurozone area, we reduced our underweight to Germany and Italy, alongside our overweight to Spain. We maintained our underweight to France and overweight to Greece. Elsewhere, we closed our overweight to Australia and Canada duration.

• In developed market currencies, we added to our long US dollar position and rotated our modest long euro position to short. We rotated our short Japanese yen position to long. Furthermore, we initiated a modest long position in sterling. In addition, we added to our short Australian dollar position and retained our short Canadian dollar and Swedish Krona positions.

• Within spread assets, we reduced our overweight to emerging market hard currency debt and select high yield names. Within the IG corporate space, we retained our overweight to industrials and modest overweight to financials. We also retained our overweight to securitised assets.

The Ukraine war has aggravated inflation pressures and put central banks across the globe in a difficult position. We expect central banks to quickly normalize their policy stance, with rates rising from historically low levels. However, trying to contain inflation might be costly to growth and employment and it will be difficult for central banks and governments to cushion the negative growth shock. • In the US, the recent solid growth of payrolls checked the box for the Fed in its drive toward fighting inflation – although the inflationdrivers today are largely supply-driven shocks exacerbated by the war in the Ukraine and particularly the impact on energy markets, and more recently on food/fertilizer supply. • Consequently, in defining the line on monetary policy, the Fed looks clearly committed in reaching at least policy neutrality, if not potentially policy rate levels beyond that point. We think the Fed will make at least one – and maybe two – 50 basis point rate hikes by the June FOMC meeting, which could even include an inter-meeting hike. This does not surprise us as it would build in some room to adjust policy easier in the future – if necessary – and would help suppressing inflationary conditions. However, going much further on tightening, including reducing liquidity within the system, could create instability in the market

In our view, the Fed’s policy response to the pandemic was vital, and its ongoing accommodation has been instrumental in enabling the real economy to withstand waves of new Covid variants, but monetary policy needs to migrate back toward a neutral stance over the coming few months. Policies that are too easy, and then suddenly too restrictive, should not be the appropriate course of policyexecution either. Indeed, Fed policy has been in nearly constant motion in recent years, but now that the central bank has found itself behind the curve, we think that policy needs to adjust quickly. This should not be exaggerated in terms of total amount given it poses significant risks for financial markets and the economy.

• So, while the time has come to move policy persistently and aggressively away from overly accommodative conditions, and toward a more neutral and appropriate stance, executing on this pivot is going to be a real challenge for policymakers. In addition, we see Russia’s invasion of Ukraine as a serious escalation of the conflict. The key macro impact from this event, in our view, is fastrising energy prices. This will exacerbate supply-driven inflation – while delaying and raising its peak. We think central banks will need to normalize policy to pre-Covid settings to curb inflation, and they will find it tough to respond to any slowdown in economic growth.

• The Fund underperformed its benchmark over the month driven by our emerging market and credit strategies.
• Emerging market strategies ended the month with negative returns led by our overweight to emerging market hard currency debt. Our positioning within local rates detracted, driven by our off-benchmark allocation to Brazil. Moreover, our overweight to China, Mexico and South Korea local currency government bonds also detracted. Our positioning within currencies offset some underperformance. Our long Chinese renminbi, Brazilian real and South African rand positions added, partially offset by our long Russian ruble position.
• Credit strategies detracted via our overweight allocation to select high yield names and investment grade industrials. Our overweight to securitized assets added to performance, principally through US ABS and CMBS.
• Our positioning within developed market active currencies modestly added, driven by our short positioning in the euro, Australian dollar and Swedish krona.
• Macro rates strategies posted positive returns over the month, with our underweight to US duration being the main contributor. Our underweight to UK duration also added. Positioning within Europe was additive overall, driven by our underweight to Germany, France and Italy duration. Our overweight to Spain and Greece duration modestly detracted. Yield curve positioning in the US, Germany and UK detracted, while curve positioning in Australia added. Our underweight exposure to inflation-linked bonds in the UK also modestly detracted.

The Fund underperformed its benchmark over the month driven by our allocation to spread assets and macro rates strategies.

• Emerging market strategies ended the month with negative returns led by our overweight to emerging market hard currency debt. Our positioning within local rates offset some underperformance, where our off-benchmark allocation to Brazil and overweight to China and South Korea local currency government bonds outperformed. Within currencies, our long Mexican peso and Thai baht positions modestly detracted.

• Our credit strategies detracted via our overweight allocation to securitized assets, predominantly through US CMBS and ABS. Our overweight exposure to select high yield names also detracted.

• Our macro rates strategies posted negative returns over the month, led by our underweight to US and UK duration. Elsewhere, our underweight to Germany and overweight to Spain and Greece duration also detracted. Conversely, our overweight duration positions in Australia, Canada and modest underweight duration position in Japan added. Yield curve positioning was positive across the US and Germany, partially offset by positioning in the UK. Our overweight to inflation linked bond exposure in the US and underweight to inflation-linked bond exposure in the UK detracted.