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Andreas Berndt, Ryan P. Blute
Are yields of less than 3% still attractive on a relative basis when compared to German Bunds and other high-quality government bonds?
How can current yields be enhanced without taking on excessive credit
or interest rate risk?
First, extend benchmark maturities to help increase portfolio yield and increase spread and interest rate risk; however, investors will then be facing the risk of higher sensitivities to future potential yield increases or higher corporate bond spreads.
The second option entails decreasing tenors of benchmarks to help reduce the risks to a credit portfolio, thereby limiting the potential for future capital losses. Given steep sovereign yield curves and record steep credit curves, this decision would likely decrease the overall carry and starting yield of the portfolio and therefore decrease the potential total return for 2013 even further.
Third, give their manager more flexibility in the way he/she can actively manage the portfolio to enhance return potential in a risk-controlled manner; we have always believed that a credit portfolio has to be managed actively. In a world of low returns, alpha generation becomes even more important and can be a significant part of overall total return.
1. Using credit default swaps (CDS) on an unleveraged basis
2. Tactically allocating to ‘Rising Star’ candidates
3. Exploiting relative value between sovereigns and credit
4. Allocating to credits on a global basis, including emerging market issuers
A word about risk: Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Credit default swap (CDS) is an over-the-counter (OTC) agreement between two parties to transfer the credit exposure of fixed income securities; CDS is the most widely used credit derivative instrument. All investments contain risk and may lose value.
This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2013, PIMCO.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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