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.
Blog On‑and‑Off‑and‑On‑Again Progress Toward a U.S. Debt Ceiling Agreement We remain constructive on a deal coming together in time to avert a default on U.S. debt, though we expect continued drama in the very near term.
Strategy Spotlight Income Fund Update: Building Resilience and Harnessing Yield in High Quality Assets Despite economic uncertainty, we see compelling value in high quality, liquid assets that we view as more resilient in the face of a potential recession.
Viewpoints Modernizing the Diversification Toolkit: Allocating to Defensive Alternatives A guide for investors embarking on the journey of building a defensive alternatives program.
Municipal Monthly Monthly Municipal Market Update, April 2023 A brief update on what's happening in the municipal bond market.
Viewpoints Spring Brings Cautious Optimism to U.S. Housing Market Although affordability remains an obstacle, recent data offer reasons to be more constructive as broader conditions still appear supportive of home prices.
Asset Allocation Outlook Whether Pause or Pivot, Look to Bonds An allocation to fixed income may help investors navigate a potential recession as well as uncertainty around the Federal Reserve’s policy trajectory.
Blog Regional Bank Stress Puts Spotlight on Cash Management Shocks to the U.S. banking system underscore how even cash holdings can involve risk and also suggest that the timeline for a recession may have drawn nearer.
Viewpoints Debt Ceiling Debate: Examining Risks Around the X Date Debt ceiling concerns are rippling through financial markets. We discuss the potential risks and opportunities for investors.
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.