Stable Value in Context: Navigating Challenges, Managing Risk

Portfolio manager David Braun discusses our outlook for inflation, interest rates and policy, and how our strong focus on risk management has helped our stable value portfolios deliver for our clients.

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Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: What is PIMCO's outlook for the next 12 to 18 months?

David Braun: So, what is PIMCO's outlook for the next 12 to 18 months? We're actually calling for very strong growth recovery in 2021.

Text on screen: David L. Braun, Head of US Financial Institutions Portfolio Management

A lot of this is fueled by the fact that we're past the peak of the pandemic and thus the economies are allowed to reopen. We're calling for developed market growth to be around 6% real GDP in 2021, largely fueled by the US coming in around 7% real GDP.

Full page list graphic – Title: Main forces driving growth recovery in 2021, Bullets: Economies are allowed to reopen, Monetary and fiscal stimulus, Passing peak policy support point, Fed considering to taper off its asset purchases near-term

Now much of this growth is fueled by very aggressive monetary and fiscal stimulus and since we're past the point of the peak pandemic, it's logical to conclude, we're perhaps past the point of peak policy support. You look at the fiscal side, we know the stimulus checks that went out in March are not going to be repeated and we know that the unemployment benefits that were bumped up are likely going to go away in the fall. On the monetary policy side, we've heard last week, the Fed talk about beginning to taper its asset purchases at some point in the near term horizon.

As a result of the stimulus beginning to wane, we're likely at the point of peak growth right now in the US, therefore we see developed market growth in 2022 declining to around 3% real and the US slightly behind that. That's a base case economic outlook. You have to be humble and acknowledge that there's a lot of uncertainty around that base case, especially with what we're trying to do here, which is go from a policy led recovery to an organic led recovery.

Text on screen: What happens with inflation?

On the inflation side we acknowledged that we're in the middle of a multi-month period where inflation data is coming in very high. However, we believe that that is temporary or as the Fed calls it, transitory.

Full page list graphic – Title: Current high inflation data - Fed calls it “transitory, Bullets: Fueled by supply side challenges, Fiscal accommodation is being spent on goods and services, High unemployment levels and the accelerated productivity gains

It's largely currently being fueled by supply side challenges that we all know about. It's also being fueled by the enhanced fiscal accommodation here in the US, which is being spent on goods and services and causing that inflation.

Furthermore, we believe today's high unemployment levels and the accelerated productivity gains we're making in the economy will also be a headwind to inflation. As a result, we believe the US inflation will peak in the coming quarter at around 4% declining to about 3% by year end and then in 2022, normalizing to around 2.3%.

With that as our growth and inflation backdrop, we believe the US 10year treasury will trade largely in a range, call it one and a half to 2%. Given today's starting level. You can expect this to be slightly underweight duration versus a benchmark.

Text on screen: How are we positioning stable value portfolios right now?

So how are we positioning stable value portfolios right now?

Full page list graphic – Title: Expect heightened market volatility, Bullets: Focus on risk management and diversification, Focus on portfolio liquidity, Focus on portfolio flexibility

First, with the heightened macroeconomic volatility that we expect, it's likely to expect heightened market volatility. Therefore, you need to focus on risk management and diversification and being patient as an investor. Focus on portfolio liquidity and portfolio flexibility so that as volatility emerges, you're ready to take advantage of those opportunities.

Specifically, how are we positioning? We're slightly underweight duration to neutral duration given starting valuations and our call for the ten year to be in a one and a half to 2% range. On the credit side, we want to be overweight credit risk, given that growth backdrop I described earlier, but we want to be overweight the right credit risk. A lot of the generic credit out there in the market today is very fully valued and leverage has been rising in generic credit.

Full page list graphic – Title: Stable value portfolio positioning: Overweight in the following credit risk, Bullets: Financials, Credits related to the housing sector, Credits related to the COVID reopening theme, Securitized credit like non-agency mortgages, commercial mortgage backed securities, or CLOs

Therefore, we're focusing on things like financials and credits related to the housing sector, which is quite strong and credits related to the COVID reopening theme out there. Additional credit we're putting in portfolios is securitized credit. Whether it's non-agency mortgages, commercial mortgage backed securities, or CLOs, we find them very attractive versus similar corporates.

So this all adds up to stable value portfolios that are out yielding their generic indices in a defensive posture, a diversified posture and ready to take advantage of active management opportunities as they arise.

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Recorded 23 June 2021



Please note that this video contains the opinions of the manager as of the date recorded, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice. The Covid-19 Crisis is ongoing and discussed for illustrative purposes only, the referenced impact may not be reflective of the current environment.

A word about risk: 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. 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. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the markets perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their 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. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. 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. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current 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. ©2021, PIMCO

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