Summary

While this year’s economic shock has been severe, it was followed by an unprecedented monetary and fiscal policy response, which helps explain a relatively quick recovery in valuations.
Regulatory changes and improvement in fundamentals since 2008 have left banks in a much stronger, well-capitalized position. The risk of permanent losses remains remote; downside risk relates to coupon skip in few, select weaker banks.
Banks’ capital buffers have increased further following the rollback of procyclical regulatory measures. Not only are banks not at the center of this crisis, they are now perceived as part of the solution, which is why regulators took action to safeguard the functioning of the banking system.
While spreads have come down since the March 2020 peak, they remain elevated relative to their long-term history. We continue to see attractive opportunities in select segments of the market, but maintain a cautious approach focused on security selection as economic uncertainty remains high.

Ten years of regulation and improvement in fundamentals explain how banks have shifted from contributing to an economic crisis, to helping solve one. In this Q&A, Philippe Bodereau, global head of financial research and lead portfolio manager for the PIMCO Capital Securities Strategy, and Matthieu Loriferne, credit analyst and portfolio manager for the PIMCO Capital Securities Strategy, discuss how regulatory trends and improved fundamentals make us believe that the sector offers opportunity for credit investors.

Q: How do you compare this crisis with previous periods of severe market stress, like the global financial crisis in 2008 and the European sovereign crisis in 2011?

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Summary

While this year’s economic shock has been severe, it was followed by an unprecedented monetary and fiscal policy response, which helps explain a relatively quick recovery in valuations.
Regulatory changes and improvement in fundamentals since 2008 have left banks in a much stronger, well-capitalized position. The risk of permanent losses remains remote; downside risk relates to coupon skip in few, select weaker banks.
Banks’ capital buffers have increased further following the rollback of procyclical regulatory measures. Not only are banks not at the center of this crisis, they are now perceived as part of the solution, which is why regulators took action to safeguard the functioning of the banking system.
While spreads have come down since the March 2020 peak, they remain elevated relative to their long-term history. We continue to see attractive opportunities in select segments of the market, but maintain a cautious approach focused on security selection as economic uncertainty remains high.

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Disclosures

IMPORTANT NOTICE

Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

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. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Diversification does not ensure against 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.

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PIMCO Capital Securities Strategy Update: Banking Sector Evolves From Problem to Solution

Q: How do you compare this crisis with previous periods of severe market stress, like the global financial crisis in 2008 and the European sovereign crisis in 2011?

The Author

Philippe Bodereau

Matthieu Loriferne

Related

Opportunities in Private Credit: Stepping In as Banks Step Out

Specialty Finance: The $20 Trillion Next Frontier of Private Credit

Navigating Credit Markets Today – A Q&A With Mark Kiesel and Jamie Weinstein

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Understanding Investing: Understanding Preferred Securities

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