December 17, 2020 | bloomberg.com

Markets Bond Market’s Scariest Gauge Is Worse Than Ever Corporate credit markets are more exposed to duration risk than at any other time in history. By Brian Chappatta January 14, 2021 Around this time a year ago, I ruffled in every sense of the word. While one-way moves of that kind of a few feathers among bond traders with As was the case last time around, this is magnitude are rare, benchmark 10-year the headline “This Is the Scariest Gauge happening because the numerator (yield) Treasury yields did increase by 20 basis for the Bond Market.” The upshot was has continued to tumble while the denomi- points in the first five trading days of the that when looking at the ratio of yields nator (duration) increases. The average new year. So with the duration of the on corporate debt relative to its duration, investment-grade corporate bond yield was corporate-bond index at almost nine years investors were more susceptible to losses a record-low 1.74% as of Dec. 31, compared heading into 2021, it’s basic math (roughly from a move higher in interest rates than with 2.84% a year earlier, while the modi- 8.84 times 0.2%, with a slight adjustment at any time in history. fied duration on the index increased to for spread tightening) that investment- Well, if that gauge was scary in January 8.84 years at the end of 2020, just about a grade bonds lost 1.52% last week. It really 2020, it’s downright terrifying now. record high, from 7.96 years at the start. doesn’t take much of a move higher in in- The “Sherman Ratio,” named after The first week of 2021 demonstrated terest rates to wipe out the income return DoubleLine Capital Deputy Chief Invest- how potentially perilous this dynamic can on the index or a fund tracking it. ment Officer Jeffrey Sherman, basically be for credit investors. Investment-grade Yes, U.S. yields have retreated so far shows the amount of yield investors earn corporate bonds suffered their worst loss this week, providing a reprieve from the for each unit of duration. It tumbled to as since August, and second-biggest decline losses. But the Sherman Ratio should little as 0.1968 on Dec. 31 for the Bloom- since March, even though spreads nar- serve as a reminder to those investing in berg Barclays U.S. Corporate Bond Index, rowed and there’s no sign of broad stress corporate bonds that they’re effectively a record low in data going back more than in high-grade markets. Duration, for the buying U.S. Treasuries with slightly higher three decades. That compares with the unfamiliar, is simply a measure of a bond’s yields. To that point, the 120-day correla- previous low of 0.3467 I flagged in early sensitivity to a given move in interest tion between the iShares 20+ Year Trea- January 2020. And while that former rates. For example, a security with a dura- sury Bond exchange-traded fund (ticker: milestone wasn’t too much lower than tion of five years would gain 5% if rates fell TLT) and the iShares iBoxx $ Investment previous instances, current investment- 100 basis points or lose 5% if rates rose by Grade Corporate Bond ETF (ticker: LQD) grade corporate-bond yields are an outlier 100 basis points. reached 0.73 on Wednesday, the highest since March 6. A reading of 1 implies the two funds move in perfect lockstep; a reading of negative 1 signals they move in entirely opposite directions. On a 60-day basis, the correlation is 0.8. It’s certainly reasonable to expect that high-grade corporate bonds will outper- form Treasuries as the economy recovers. But it doesn’t seem as if they’ll do all that much better. The average yield spread is just 95 basis points, compared with a post- financial crisis low of 85 basis points set in February 2018 as the Federal Reserve was in the middle of its tightening cycle and benchmark yields were racing higher. And the index has become somewhat riskier since then — triple-B rated bonds make up more than 50% of its market value, up from 48% in early 2018. All else equal, that makes it tougher for spreads to tighten further. Markets Bloomberg.com January 14, 2021

move higher in U.S. yields. A slow and steady climb like the one in the second half of 2020 is one thing. Even last week’s jump above 1% was tolerable, given the outlook for additional fiscal stimulus now that Democrats will control the Senate in addition to the House and the presidency. But as I said when 10-year yields crossed 1%, now comes the hard part, both for the Fed and bond traders. At the central bank, officials are already starting to walk back last week’s taper talk. Meanwhile, Trea- sury yields retreated after strong auctions as yields approached levels that some viewed as attracting demand from over- seas investors. HSBC Holdings Plc put out a report that said in no uncertain terms: “Buy U.S. Treasuries after yield spike.” It’s likely to be a grind from here. That’s great news for corporate-bond The Sherman Ratio is meant to “calcu- reached a point that even a 20-basis-point buyers who can ill afford a sharp move late what percentage increase in rates will move is enough to wipe out a $6.75 trillion higher in interest rates. It seems as if no offset a bond fund’s yield,” according to index of company debt. matter how low the Sherman Ratio goes, DoubleLine. For fixed-income investors That’s just one more reason to expect fixed-income investors always manage to who think 10-year Treasury yields will the Fed will push back against any swift avoid the nightmare scenario. continue to move up this year as more Americans receive Covid-19 vaccinations, perhaps reaching JPMorgan Chase & Co.’s recently revised forecast of 1.45%, one of the few choices left that doesn’t lock in losses is junk bonds. The Sherman Ratio on the Bloomberg Barclays U.S. High Yield Index isn’t exactly appealing — it fell to a record low of 1.15 last week — but the secu- rities are more insulated from interest-rate swings with a duration of just 3.64 years, less than the five- and 10-year average. As I noted last year, holding investment- grade corporate debt only lost investors money six times since 1981, but those instances are becoming more frequent, including 2013, 2015 and 2018. The nearly four-decade bull market in bonds has erased the income buffer that provided steady gains regardless of short-term vola- tility in benchmark Treasury yields. We’ve

Posted from Bloomberg.com, January 14, 2021, copyright by Bloomberg L.P. with all rights reserved. This reprint implies no endorsement, either tacit or expressed, of any company, product, service or investment opportunity. #C112513 Managed by The YGS Group, 800.290.5460. For more information visit www.theYGSgroup.com. iShares iBoxx $ High Yield Corporate Bond ETF (HYG) As of December 31, 2020 Investment Objective & Summary The iShares iBoxx $ High Yield Corporate Bond ETF seeks to track the investment results of an index composed of U.S-dollar-denominated, high yield corporate bonds.

Carefully consider the Fund’s investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Fund’s prospectus, and if available, summary prospectus, which may be obtained by calling 1-800-iShares (1-800- 474-2737) or by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities. Diversification may not protect against market risk or loss of principal. Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Any applicable brokerage commissions will reduce returns. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. “Acquired Fund Fees and Expenses” reflect the Fund’s pro rata share of the indirect fees and expenses incurred by investing in one or more acquired funds, such as mutual funds, business development companies, or other pooled investment vehicles. AFFE are reflected in the prices of the acquired funds and thus included in the total returns of the Fund. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited. This company does not make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the company listed above. © 2020 BlackRock. All rights reserved. iSHARES, iBONDS and BLACKROCK are registered trademarks of BlackRock Inc, or its subsidiaries. All other marks are the property of their respective owners. For more information, visit www.iShares.com or call 1-800-iShares (1-800-474-2737).

iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) As of December 31, 2020 Investment Objective & Summary The iShares iBoxx $ Investment Grade Corporate Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, investment grade corporate bonds.

Carefully consider the Fund’s investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Fund’s prospectus, and if available, summary prospectus, which may be obtained by calling 1-800-iShares (1-800- 474-2737) or by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing. Investing involves risk, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Diversification may not protect against market risk or loss of principal. Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Any applicable brokerage commissions will reduce returns. Index returns are for illustrative purposes only. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results. “Acquired Fund Fees and Expenses” reflect the Fund’s pro rata share of the indirect fees and expenses incurred by investing in one or more acquired funds, such as mutual funds, business development companies, or other pooled investment vehicles. AFFE are reflected in the prices of the acquired funds and thus included in the total returns of the Fund. The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”). The iShares Funds are not sponsored, endorsed, issued, sold or promoted by Markit Indices Limited. This company does not make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with the company listed above. © 2020 BlackRock. All rights reserved. iSHARES, iBONDS and BLACKROCK are registered trademarks of BlackRock Inc, or its subsidiaries. All other marks are the property of their respective owners. For more information, visit www.iShares.com or call 1-800-iShares (1-800-474-2737). s su nd F As o eceer nsn u e iares ear reasur Bond EF seeks o rack e inesen resuls o an index coposed o reasur onds i reainin auriies reaer an en ears

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Iportant Inoration Reardin is aterial Iportant Inoration Reardin DoubleLine’s Inestent tle Issue selection processes and tools illustrated trouout tis presentation are saples and oubleine seeks to axiie inestent results consistent it our interpretation o client a be odiied periodicall ese are not te onl tools used b te inestent teas, are uidelines and inestent andate ile oubleine seeks to axiie returns or our extreel sopisticated, a not alas produce te intended results and are not intended clients consistent it uidelines, oubleine cannot uarantee tat oubleine ill or use b nonproessionals outperor a clients speciied bencark or te arket or tat DoubleLine’s risk anaeent tecniques ill successull itiate losses Additionall, te nature o portolio oubleine as no obliation to proide reised assessents in te eent o caned diersiication iplies tat certain oldins and sectors in a clients portolio a be risin in circustances ile e ae atered tis inoration ro sources belieed to be reliable, price ile oters are allin or tat soe issues and sectors are outperorin ile oters oubleine cannot uarantee te accurac o te inoration proided ecurities discussed are underperorin uc out or underperorance can be te result o an actors, suc are not recoendations and are presented as exaples o issue selection or portolio as, but not liited to, durationinterest rate exposure, ield cure exposure, bond sector anaeent processes e ae been picked or coparison or illustration purposes onl exposure, or nes or ruors speciic to a sinle nae o securit presented itin is eiter oered or sale or purcase oubleine reseres te rit to cane its inestent perspectie and outlook itout notice as arket conditions oubleine is an actie anaer and ill adjust te coposition o clients’ portolios dictate or as additional inoration becoes aailable is aterial a include stateents consistent it our inestent team’s judent concernin arket conditions and an tat constitute “forwardlookin statements” under te securities las Forardlookin particular sector or securit e construction o oubleine portolios a dier stateents include, aon oter tins, projections, estiates, and inoration about substantiall ro te construction o an o a ariet o arket indices As suc, a possible or uture results related to a client’s account, or arket or reulator deelopents oubleine portolio as te potential to underperor or outperor a bond arket index ince arkets can reain ineicientl priced or lon periods, DoubleLine’s perorance is Iportant Inoration Reardin Risk Factors properl assessed oer a ull ultiear arket ccle Inestent strateies a not aciee te desired results due to ipleentation la, oter tiin actors, portolio anaeent decisionakin, econoic or arket conditions or Iportant Inoration Reardin Client Responsibilities oter unanticipated actors e ies and orecasts expressed in tis aterial are as o te Clients are requested to careull reie all portolio oldins and strateies, includin b date indicated, are subject to cane itout notice, a not coe to pass and do not coparison o te custodial stateent to an stateents receied ro oubleine Clients represent a recoendation or oer o an particular securit, strate, or inestent All sould proptl inor oubleine o an potential or perceied polic or uideline inestents inole risks Please request a cop o DoubleLine’s For A Part A to reie inconsistencies In particular, oubleine understands tat uideline enablin lanuae is te aterial risks inoled in DoubleLine’s strateies Past perorance is no uarantee o subject to interpretation and oubleine stronl encouraes clients to express an uture results contrastin interpretation as soon as practical Clients are also requested to noti oubleine o an updates to Client’s inoration, suc as, but not liited to, addin ailiates includin Iportant Inoration Reardin oubleine broker dealer ailiates), issuin additional securities, nae canes, erers or oter In preparin te client reports and in anain te portolios), oubleine and its endors alterations to Client’s leal structure price separate account portolio securities usin arious sources, includin independent pricin serices and air alue processes suc as bencarkin CFA® is a reistered tradeark oned b CFA Institute o receie a cop o DoubleLine’s current For A ic contains iportant additional oubleine roup is not an inestent adiser reistered it te ecurities and Excane disclosure inoration, includin risk disclosures), a cop o DoubleLine’s prox otin policies Coission EC) and procedures, or to obtain additional inoration on DoubleLine’s prox otin decisions, please contact DoubleLine’s Client erices oubleine® is a reistered tradeark o oubleine Capital P oubleine Capital P