Text on screen: PIMCO
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Text on screen: Dan Ivascyn, Group Chief Investment Officer
Ivascyn: Probably the most important things I can say on this call is that, it's a very attractive environment for income generation. Yields are attractive . I say this, in historical context, back when we had the last, inflation shock, you know, coming out of the Covid period, you know, starting high quality bond yields, on a global basis were down in the 1 to 2% range.
That's very different today. Even with anticipated higher inflation over the course of the next few quarters, most high quality bond yields, are well above those inflation levels.
So you have this yield cushion. And our overall positioning or interest rate exposure reflects the fact that not only did you have, exciting and attractive long term valuations, you've also now been able to take advantage of and we've been able to take advantage of, a pretty significant spike in yields in certain high quality bond markets, in response to the conflict, in Iran. So when you look at opportunities across, the developed world today, government bond markets offering four and a quarter to 5 percent type, intermediate term yields, you attach even a safe spread to that. You can quickly get up into the 5 to 6% range and then through some other, you know, creative portfolio construction, get the yield, even higher than that.
So that's really the foundation in terms of our thinking, is that you don't have to predict what central banks do. You don't have to predict, when the crisis, in Iran, is going to be reconciled, you can just take advantage of attractive absolute valuations, within higher quality fixed income as well as, very attractive relative valuations. If you compare today's level of yield versus credit spreads, versus equity valuations, again, history is really on your side in terms of being able to generate, you know, attractive base case, returns and very attractive relative returns as well.
Second point, we talked about, extreme macro uncertainty and policy uncertainty and macro uncertainty, you know, for financial professionals is arguably easier to analyze. But when you're talking about politics, you're talking about war, you're talking about the possibility of, significant deterioration in global, geopolitical relationships. That's a bit harder to forecast. And you have to accept the fact that we are in a highly uncertain world and that uncertainty is not going to get resolved, over the near term.
We also, you know, combine that with, pretty stretched valuations still in the riskier segments of the credit markets. Throw in some AI disruption and, elevated, macro, elevated equity valuations. We also think it makes sense, for, our income strategies to stay up and quality stay diversified . But resist the temptation just yet to shift into a meaningful allocation for the more economically sensitive areas, of the global bond markets.
So in that second theme is up and quality. And related to that, a global diversification.
You know, outside of the United States, taking advantage of a full global opportunity set up. Then the last point, you know, is, liquidity. Liquidity means future flexibility. And when you're in a world where credit spreads are tight and macro uncertainty is quite elevated, maintaining liquidity means future portfolio flexibility. It means that we’ll be able to, in certain scenarios, provide liquidity to others that desperately need it.
We think that the strategy, is set up well to take advantage of what very well could be very exciting opportunities associated with this dislocation.
Text on screen: Esteban Burbano, Fixed Income Strategist
Burbano: A big picture question we get a lot is what how should investors think about fixed income allocations today. And what kind of risk return profile should they be thinking about, especially within the context of high quality bonds going forward?
Ivascyn: Anytime you have an inflationary shock, your conviction level in terms of short term performance goes down.
It's just the natural, impact of this source of uncertainty. But that should be true for risky assets as well. Credit spreads are equities. This is an environment not unique to fixed income. In terms of near-term challenges. It's true of, financial markets, pretty much across the board. But when you look at starting valuations, if you simply plot starting valuations today in the fixed income marketplace versus where they'd been in the last couple of decades, you'll see a meaningful valuation cushion, relative to, elevated inflation rates relative to the level where global equity markets and certainly U.S. equity markets are trading relative to the starting point in terms of credit spreads more broadly, when you go out and look at what future performance has been when you've had this type of valuation cushion, absolute and relative, it history is very favorable up to a fixed income strategies generating attractive returns. You couple that with a flexible strategy like our income strategy that could target opportunities across the global, opportunity set that could take advantage of not only attractive starting yields.
And this is the misconception that somehow because starting yields are at a certain level, that's what you could expect from fixed income, for a flexible strategy like income, I think you can view it as you do it as a longer term floor, with exciting opportunities to generate incremental alpha, incremental, performance, from shifting, your asset allocation over the course of the next several years.
So, again, a lot of near-term uncertainty. But for investors in the strategy, that have a three year, 3 to 5 year type horizon, the future looks quite attractive.
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Disclosure
The discussion and content provided herein has been extracted from a webcast and is intended for informational purposes 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.
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 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. 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. 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.. Diversification does not ensure against loss.
References to liquidity are based on normal market conditions and are subject to change.
Alpha is a measure of performance on a risk-adjusted basis calculated by comparing the volatility (price risk) of a portfolio vs. its risk-adjusted performance to a benchmark index; the excess return relative to the benchmark is alpha. The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively. “Safe spread” is defined as sectors that we believe are most likely to withstand the vicissitudes of a wide range of possible economic scenarios. All investments contain risk and may lose value.
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.
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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