Leaving PIMCO.com

You are now leaving the PIMCO website.

Skip to Main Content
Economic and Market Commentary

Forecast Favors Fixed Income

Learn why we believe it is prime time for bonds, how we’re emphasizing diversification and caution and prioritizing quality, and where the opportunities are in today’s markets and beyond.

Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized

Text on screen: Berdibek Ahmedov, Product Strategist, Multi-Asset Strategies

Berdibek: PIMCO recently published our asset allocation outlook for the year ahead, titled “Prime Time for Bonds.”  

Erin, Can you start by sharing PIMCO’s economic outlook and what this implies for positioning in our multi-asset portfolios

Text on screen: Erin Browne, Portfolio Manager, Asset Allocation

Erin: Absolutely, our base case economic outlook for the next 6-12 months includes both slowing growth as well as slowing inflation, along with the potential for a mild recession, the odds of which we characterize being about 50 percent.

Text on screen: TITLE – Positioning in our multi-asset portfolios: BULLETS – Emphasis on diversification, Prioritizing quality, Strongly favor fixed income, Neutral on equities

Given our outlook, we’re emphasizing diversification and caution in our portfolios and we’re prioritizing quality. We believe the shift from above trend to below trend economic growth, and the potential mild recession favors bonds and therefore we strongly favor fixed income in our multi-asset portfolios.

We maintain a neutral stance on equities due to the disconnect between valuations, earnings estimates, as well as economic fundamentals. We are coupling this with options-based downside risk mitigation strategies as well as a focus on relative value opportunities.

At current valuations equities do not adequately account for the potential downside risk of a deeper recession. And we also believe that equity volatility is currently undervalued considering the heightened economic volatility.

Berdibek: Thank you Erin, now turning to Emmanuel, how does the relative value of equities compare to fixed income today?

Text on screen: Emmanuel S. Sharef, Portfolio Manager, Asset Allocation

Emmanuel: So, a simple metric we use to look at equity valuations relative to bonds is called the equity risk premium, which tells us how much we’re being compensated for the extra risk and volatility of owning stocks.  That measure is at its lowest level in over 20 years, similar to just before the great financial crisis.

Text on screen: Given low equity risk premium, fixed income offers better opportunities than equities

Images on screen: PIMCO trade floor

And when the equity risk premium is low, it means that bonds offer better opportunities compared to equities.

Another way to think about it is by comparing current bond yields to earnings yields on equities. As a reminder, starting bond yields tend to be reliable predictors of future returns, and as yields have risen, the return potential for high quality bonds has risen as well. And meanwhile, as Erin pointed out, equities have lower base-case returns now, and also downside risk in a recession and generally higher volatilities,

Text on screen: We believe the risk-adjusted returns on bonds may be higher than equities

Images on screen: PIMCO trade floor

so the risk-adjusted returns on bonds may actually be higher than for equities at the moment. And so we think in a portfolio context this means that it merits a much higher allocation to bonds than in the past.

Berdibek: Turning back to Erin, within equities, do you see any attractive relative value opportunities in specific themes or sectors today?

Erin: In short, yes. While our overall equity exposure is neutral, we see attractive opportunities for thematic and relative value investing.

Text on screen: TITLE – Attractive opportunities in thematic and relative value investing: BULLETS – Quality companies, SUB-BULLETS: Strong balance sheets, Healthy cash flows, BULLETS – Sectors with growth potential, SUB-BULLETS – Semiconductors, Renewable energy

Firstly, thematically, we prefer to invest in quality companies. Now, these are companies that typically have strong balance sheets, generate healthy cash flows, which really help them navigate economic downturns. The quality factor tends to outperform in both recessionary as well as in overheating scenarios.

We are also focused on sectors of the economy that have the potential for growth and maintaining margins throughout the cycle.

Some examples of this is, we are bullish on semiconductors and renewable energy. And we believe that they’ll benefit from tax credit incentives, as well as strong secular demands.

On the other hand, we have a negative view on equity sectors that we believe are more sensitive to interest rates and have not fully priced in a higher-for-longer environment.

Berdibek: Thank you Erin. Emmanuel, outside of equities and US duration, are there other asset classes that you find attractive today?

Emmanuel: Absolutely. So with global yields higher, there’s much less of the fixed income universe that has zero or negative yields, and so there are now many more opportunities to add high quality global fixed income exposure.

Images on screen: Housing in Australia, UK and Japan

Outside of US treasuries, we like bonds of countries with floating rate mortgage markets, because their economies are more sensitive to higher yields. Also not every country is in the same phase of the business cycle, and we favor those where growth is weakening more quickly and that are closer to recession than the US.

Turning to credit, we’re somewhat cautious on corporate bonds. Similar to my comments earlier on equities, there’s not much compensation for the increased risk of high yield or bank loans. Especially because these sectors are where the effect of higher rates or an economic slowdown will be felt most acutely.

Text on screen: TITLE – Where we see opportunities in credit: BULLETS – High-quality investment grade bonds, Securitized credit, SUB-BULLET - Agency mortgage-backed securities

So within credit we are focused on high quality investment grade bonds. We also like securitized credit and especially agency mortgage backed securities, which are high-quality, very liquid, and where spreads have widened to levels comparable to the great financial crisis.

And then finally, on emerging markets, there are select opportunities in local markets where inflation is already coming down, real interest rates are high, and central banks in some cases have already begun the cutting cycle.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO


This material contains the opinions of the manager 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.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Corso Vittorio Emanuele II, 37/Piano 5, 20122 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-, Brandschenkestrasse 41 Zurich 8002, Switzerland). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015 . The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO.


Featured Participants

Tell us a little about you to help us personalize the site to your needs.

Terms and Conditions

Please read and acknowledge the following terms and conditions:
{{!-- Populated by JSON --}}
Select Your Location


  • The flag of Canada Canada

Europe, Middle East & Africa