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PIMCO’s Ivascyn Warns Inflation Boost Is Still Worth Hedging

Pressures may be “alarming,” but protection is still affordable. PIMCO is looking at less easily-traded credit and private markets.

Inflation may be a transitory scare in global markets, but it doesn’t pay to ignore the risks. That’s the advice from the chief investment officer of fixed-income behemoth Pacific Investment Management Co.

Prices are likely to rise sharply this year, perhaps “alarmingly in certain quarters,” said the firm’s Dan Ivascyn Thursday, in an online keynote address to Morningstar’s annual investor conference in Sydney. The boost is likely to be temporary, as the global economic recovery from the pandemic pits increased demand against supply shortages, but it’s still worth investing in protection for fixed-income portfolios, he said.

“Our current thinking is that any type of inflation pressures will be transitory, but you’re not getting paid a lot of money to bet against inflation at this point,” Ivascyn said. “We remain quite defensive towards inflationary risks.”

Price indexes globally already reflect strengthening pressures, with core consumer prices in the U.S. rising the most since the 1980s in April. And market-based measures of inflation expectations have climbed markedly since the pandemic-driven slump around March last year. One gauge, which proxies the outlook over five years based on U.S. Treasury yields, is near the highest levels since 2005.

Ivascyn still agrees with the prevailing view of the Federal Reserve, that inflation will settle lower in coming years as the disinflationary forces of increased technology and aging populations reassert themselves. The core rate may peak out above 3% before easing back toward the bank’s target of 2%.

“We do think it makes sense to look for and source inflation protection within the fixed income markets,” Ivascyn said, noting that hedges can still be bought “at a reasonable level.”

Pimco is favoring those parts of the high-yield market most likely to benefit from an economic reopening, including airlines, hospitality and gaming sectors, and commercial real estate, he said.

Given “how expensive easy-to-own sectors of the market are today,” it’s important to explore other parts of the credit universe, Ivascyn said.

He likes emerging markets that are lagging the recovery in the developed world, and “expanding into some of the less-liquid private segments of the market.” This includes housing investments, as Ivascyn believes the increase in house prices is happening against a backdrop of “quite rational” credit, with buyers not getting overextended as they were prior to the 2008-9 crisis.

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Jackie Edwards

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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.

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