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: Kimberley Stafford, Global Head of Product Strategy
KIM STAFFORD: Hello, I'm Kim Stafford and I'm here again with PIMCO Group CIO Dan Ivascyn to give you an inside look at some of the recent discussions taking place within PIMCO's Investment Committee or IC. Thank you for joining Dan!
DAN IVASCYN: Thanks, Kim!
KIM STAFFORD: The bond market in 2025 has had its best performance in years, and this has happened even without a major rally in rates. What have been the key drivers of the strong returns and what is the opportunity that we see in fixed income going forward?
DAN IVASCYN: Sure. You're right. It's been an exciting year, a great year from a performance perspective.
Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
And there've been a lot of areas of the market that have worked in terms of generating return, maintaining liquidity, maintaining investment flexibility as well.
Text on screen: TITLE – Key drivers of strong bond returns in 2025:, BULLETS – Attractive starting yields, Relative value opportunities across global yield curves, Global currency exposure, Target-rich spread sectors
But really it's been the starting yield being so attractive that's driven a good portion of those returns.
There's been also a lot of relative value opportunities just across yield curves as well. The front end of the yield curve, shorter maturities have outperformed longer maturities.
The United Kingdom, even the long end of the Japanese market, Australia, a very high quality bond market, all provide very attractive yields when you hedge back to the US dollar. So these have been great diversifiers reducing portfolio volatility and also generating attractive returns. And then even the currency, the dollar itself has weakened a little bit this year.
Another key theme of ours, very small dollar underweight expressing relative values views across some of the more liquid higher quality currencies across the globe have provided some incremental return. And then last but not least, what we call the spread sectors of the credit sectors have been quite target rich as well. So high yield, lower quality credit has performed well consistent with the elevated equity returns, but you've also been able to generate very attractive returns for our clients in higher quality, more resilient areas of the market.
A lot of diversified sources of return using all the tools of the toolkit.
So excited about the year, more importantly, excited about the prospects for future returns as well with yields still elevated, offering attractive opportunities and lots of less correlated cycles around the globe allowing us, again, to generate attractive returns versus passive alternatives that are out there.
KIM STAFFORD: Private credit has been a hot topic for clients. There's been some concern in the wake of the recent bankruptcies involving companies who are accessing these markets. Does PIMCO have concerns about private lending? How are we thinking about private markets and really credit more generally given where we are in the credit cycle?
DAN IVASCYN: Yeah, so short answer is, some concerns, but it's not about private credit versus public credit.
I think the right way to look at credit from an investor's perspective is across the liquidity spectrum. Am I getting paid to take less liquidity? And then across the credit or the economic sensitivity spectrum, the more economic sensitivity I have, the lower quality that particular form of credit risk, the more spread compensation that we as investors want to get.
And I think what's important to note is that we've had many, many years of very strong credit performance. We have very tight spreads.
Text on screen: Rapid growth in economically sensitive credit market areas brings risks
Images on screen: Signing a bank loan
We've had a lot of growth in some of the more economically sensitive areas of the credit markets, and that's true of bank loans which are considered more public in nature or private credit, mid-market direct lending as an example, which is considered more private.
So given the expansion we've seen in these markets, given some of the deterioration in underwriting, it shouldn't be a surprise that we're having a few credit problems.
We do think that some of these areas of the market that have grown too quickly are going to disappoint investors.
What's great as an active investor, and I use the term investor as opposed to deployer, sometimes it feels like people are simply deploying the money that's coming in from investors.
Text on screen: Active investing helps identify resilient opportunities
Images on screen: Shipping, Cargo containers
This is very exciting. It allows us to make relative credit decisions, focus on areas that are more resilient in nature. And when you do have that economic slowdown, people will see the difference between resilient and less resilient profiles. So I think our mindset at PIMCO is let's maintain liquidity, which means future portfolio flexibility.
KIM STAFFORD: Many clients are growing cautious on what's a maturing bull market in equities. Stock valuations are near all-time highs, and it seems like there's a near endless expenditure on AI in the market. How should clients think about the opportunity and the risk in balancing those things in today's financial markets?
DAN IVASCYN: If you look at the starting valuation for equities today, the starting valuation for high quality fixed income, you compare those relative valuations over multiple decades of history, on a forward basis,
Text on screen: Valuations suggest bonds are poised to outperform equities
Images on screen: PIMCO trade floor
bonds are expected to do quite well, absolute relative to equities, relative to their lower anticipated volatility and relative to cash. So, whatever mix you had for much of the last 10 to 15-year period between stocks, bonds, cash, other instruments, you probably want to shift a little bit of money away from these sectors that have served you well but are stretched from a valuation perspective.
I think the same mindset holds though within equity markets. You have significant dispersion, significant differentiation across sectors from a valuation perspective. So, there's a lot of attractive, active decisions that can be made within that space, but I think just the bottom line starting valuation is one where investors should be more cautious.
But as an insurance policy of sorts, we do think it makes sense to diversify a little bit into fixed income. I think the same is true in, and perhaps I even have a stronger level of conviction as it relates to cash, because the cash rate with near certainty is heading lower, at least lower over the near term,
Text on screen: Falling rates favor a shift from cash to bonds
Images on screen: PIMCO trade floor
and it's the first time in a long time where that cash rate is heading to a level meaningfully below the yield you can get in an intermediate duration high quality bond portfolio.
KIM STAFFORD: Thanks very much Dan, and thanks to all of you for joining us! We'll see you next time.
Text on screen: For more insights and information visit pimco.com
Text on screen: PIMCO
Disclosure
Past performance is not a guarantee or a reliable indicator of future results.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Private credit involves an investment in non-publicly traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
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.
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