Blog Proceed With Caution: Opportunities for Cash and Defensive Income Amid Uncertainty We believe short-dated bonds can offer attractive yields, flexibility, and a means to proceed cautiously as central banks continue to raise interest rates.
U.S. Federal Reserve Chairman Jerome Powell’s recent Jackson Hole speech was a succinct and powerful pronouncement to vanquishing inflation that lacked support for near-term economic growth. His message was a warning of potential hazards ahead as the Fed continues to fight any remaining inflation threats, either forecasted or unexpected. Today’s markets are undoubtedly volatile, as investors face uncertain central bank policy (read about ECB policy here) and evolving market consensus outlooks for economic growth. We expect monetary policy to remain restrictive across major economies, despite slowing growth and rising recession risks, as global central banks struggle to gain control of persistent inflation. With the path to smooth returns across many asset classes overgrown with obstacles, we suggest investors consider the following potential benefits of investing in shorter maturity bonds: Front-end yields increased to attractive levels: U.S. front-end yields have climbed over the past nine months and are near 15-year highs, which could make them potentially attractive investment solutions for investors compared to the recent past. With less interest rate and credit sensitivity, short-maturity bonds can potentially outperform longer-dated bonds when rates are rising and more credit-sensitive bonds when economic growth is waning. Moreover, given the shorter-maturity nature at the front end of the curve, combined with higher starting yields, short-term bonds and strategies have the potential to more quickly reverse losses caused by market volatility. Positioning defensively provides flexibility to be opportunistic: We see a strong case for multi-sector portfolios to increase exposure to cash and shorter-maturity bonds to potentially increase liquidity and stability. Positioning portfolios defensively offers investors the flexibility to tactically maneuver when opportunities across various asset classes present themselves. Higher front-end rates and a flatter yield curve mean an investor doesn’t need to take substantial interest rate risk or sacrifice liquidity to receive attractive compensation for capital over the next year. Short-duration portfolios may offer resiliency during heightened uncertainty: Investors should remain cautious while central banks continue to tighten. Shifting a portion of an investor’s asset allocation to a diversified fixed income portfolio with less than two years of duration can potentially provide liquidity and a relatively low risk solution amid increased market volatility if longer-dated yields rise more than expected and risk assets reprice into 2023. Summary While we believe it’s prudent to be cautious today, investors have opportunities to be well-compensated for their patience until the road is clear and conditions turn more favorable. The U.S. economy is at, or near, stall speed and the probability of recession appears higher over the next 12-18 months. One can actively manage around this economic uncertainty by reducing risk allocations, raising cash levels, and proactively managing liquidity in a way that is both defensive, but also optimized – an approach with the potential to realize liquidity premiums to benefit returns. Visit our short-term page for more on PIMCO’s approach to investing in short-term markets. Jerome Schneider leads short-term portfolio management at PIMCO.
Viewpoints Growing Demand, Tight Supply Support Commodities in 2023 Despite macroeconomic headwinds, commodities markets may offer attractive return potential this year in light of ongoing supply constraints and China’s reopening.
Blog The ECB Is Not Done Yet The European Central Bank raised its policy rate, and more hikes are coming.
Blog Fed Seeks to Balance Competing Risks Investors face mixed signals between the Federal Reserve’s policy guidance and recent economic developments.
Blog Trying to Make Apple Juice From Oranges: The Problem With Comparing Market Pricing and Fed Projections As investors seek to pinpoint market expectations for Federal Reserve policy, it’s critical to consider not just rate projections and derivatives pricing, but the degree of uncertainty and distribution of outcomes.
Viewpoints The U.S. Debt Ceiling Debate: Expecting Resolution, Appreciating the Stakes We believe Congress will reach an agreement before the debt limit is reached, but markets could face turbulence later this year.
Strategy Spotlight Income Fund Update: A New Bond Cycle Is Dawning We believe fixed income markets offer higher yields and better valuations than in years, and we’ve positioned the Income portfolio to further benefit amid potential for volatility and a weakening economy.
Blog Dollar Strength: Sum of All Fears The dollar is set to weaken as fears over last year’s shocks abate.
Viewpoints European Front‑End Markets: Valuation Strikes Back As the European Central Bank leaves negative policy rates behind, attractive valuations herald a much-improved total return potential.
Viewpoints Seeking Harmony in Short‑Term Markets Recent volatility in short-term markets will likely, over time, be accompanied by more attractive income opportunities for cash allocations.
Featured Solutions Cash for Calls: Managing Liquidity for Illiquid Investments A framework for optimizing liquidity in alternative investments.