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Economic and Market Commentary

The Yield Advantage in Global Markets

Discover how starting yields in high-quality fixed income can set a solid foundation for multi-year returns and how active management works to boost these yields even further.

Text on screen: PIMCO

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Text on screen: Anna Dragesic, HEAD OF GLOBAL CREDIT PRODUCT STRATEGIES

Dragesic: Dan, I have to ask you, what is the yield advantage? Why is it so important?

Ivascyn: Sure. So fixed income is less complicated than other investment pursuits. 

Text on screen: Daniel J. Ivascyn, GROUP CHIEF INVESTMENT OFFICER

When you think about high quality fixed income, in particular, the starting yield is usually a reasonable floor on what you'll earn over a multi-year period.

And a few years ago, there was no yield. Inflation was better contained, but yields were incredibly low both in nominal and real terms. Today you have very attractive starting yields even in a relatively uninteresting passive benchmark like the Bloomberg Aggregate Index, where you can generate a yield of above 5%, and where you have a 95% correlation between starting yields and five year forward returns.

When you add some active management, when you expand your opportunity set into sectors that aren't represented in passive indices, you can quickly take advantage of tremendous additional opportunities and

Text on screen: Active management can help access yields in the 7% range

Images on screen: Stock market ticker

get that yield up into the six or even 7% type range.

So don't make it more complicated than it needs to be.  Be patient have a long-term focus and take advantage of, again, this yield advantage that we're talking about this year.

I like it. Don't make it more complicated than it has to be. Rich, there's still a lot of inflation volatility. So what's our view on inflation and how should investors think about inflation protection?

Clarida: Well, our thesis last year at a time

Text on screen: Richard Clarida, GLOBAL ECONOMIC ADVISOR

when we had our forum 13 months ago, inflation was running somewhere between four and 6% in the US, the UK and the eurozone. And although our thesis was it would come down, I don't think we were sure it would happen so rapidly.

Images on screen: The Federal Reserve, Bank of England, European Central Bank

Central banks have largely succeeded by raising rates into restrictive levels to reduce inflation. So they have a lot of room to cut eventually as inflation comes down or as economies soften.

And I think part of the proposition now is investors finally are getting compensated for that with these positive real yields -- not only for nominal bonds but inflation protected bonds, which are at levels again that we haven't seen in 15 plus years.

Dragesic: We've seen this generational reset higher in yields. And what's great now is that there are bonds outside of the US that look attractive. This is also - we're in London. It's great that you can get higher yields in Europe. Can you describe the opportunity across both the developed world and emerging markets?

Ivascyn: Sure, and that's another key theme coming out of our secular forum, that there's great value outside the United States. The US economy is strong. A lot of this, we think, has to do with technological innovation. The fact that during this post Covid cycle, households in the United States have locked in very, very low 30-year fixed mortgage rates.

Text on screen: Access value outside the United States

Images on screen: UK, Canada, Mexico

Take a look at other high-quality markets outside the United States. Very attractive starting yields, particularly in US dollar hedge terms. You have situations where there's more economic fragility outside the United States, perhaps less dynamic economies, household sectors that have floating rate mortgage markets, floating rate consumer debt markets that appear to be weaker than the United States, and more fiscal responsibility outside the United States, with many developed market governments running close to a balanced budget, or at least deficits in the very low single digit type areas instead of mid-single digits in the United States, despite a considerable US economic strength.

So, we think global investing is back, and that includes higher quality areas of the emerging markets as well. Very high nominal yields, very high real yields, governments and central banks that have been in some sense a bit more fiscally responsible, a bit more active in the inflation fight, again, earlier than developed market central banks, where we think there's not only attractive starting valuations, but we likely live in an economic environment in future years that can be favorable to certain segments of the emerging markets as well.

Text on screen: For more insights and information visit pimco.com

Text on screen: PIMCO

Disclosure


The discussion and content provided within this webcast is intended for informational purposes and may not be appropriate for all investors. The replay or transcript thereof provided here omits certain information contained in the original webcast and is intended for illustrative purposes only and may not be appropriate for all investors. The information included herein is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific PIMCO or other security, strategy, product or service. Fixed income is only one possible portion of an investor’s portfolio, which can also include equities and other products. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investors should speak to their financial advisors regarding the investment mix that may be right for them based on their financial situation and investment objective.

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. Income from municipal bonds for U.S. domiciled investors is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax. 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. 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 market’s 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. 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.

The correlation of various indexes or securities against one another or against inflation is based upon data over a certain time period. These correlations may vary substantially in the future or over different time periods that can result in greater volatility

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.

It is not possible to invest directly in an unmanaged index.

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.

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