Viewpoints

PIMCO’s Rigorous Approach to Managing Portfolio Liquidity Risk

By managing liquidity risk, we help ensure that portfolios are well-positioned both to withstand stress scenarios and to potentially take advantage of market dislocations.

Many market watchers cite liquidity – or the lack of it – as a major contributing factor when an investment vehicle or an entire sector suffers a significant loss during a period of market stress. This view is understandable given the empirical relationship between market liquidity and market volatility and the elusive nature of liquidity conditions during recent stress events including the 2008 financial crisis.

PIMCO’s view is that a robust portfolio liquidity risk management program can both help ensure that portfolios are well-positioned to withstand stress scenarios and allow portfolios to potentially take advantage of opportunities provided by market dislocations. Liquidity risk management is a pillar of the PIMCO portfolio and risk management process. It is a key consideration in portfolio construction and is complemented by diligent monitoring every business day within a framework that provides flexibility to incorporate impacts from evolving market conditions.

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Sudi Mariappa

Global Head of Analytics

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Disclosures

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 the current low interest rate environment increases this risk. Current 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. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. Investors should consult their investment professional prior to making an investment decision.

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. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO.