Fixed Income Returns in 2023

Text on screen: PIMCO

Footer Overlay: PIMCO provides services only to qualified institutions, financial intermediaries and institutional investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Tina Adatia, Fixed Income Strategist

Tina: Looking at markets, 2022, certainly very challenging for investors, some of the worst returns for asset prices. So how should investors be interpreting this?

Text on screen: Marc P. Seidner, CIO Non-traditional Strategies

Marc: I'm not sure it's a moment to be bold right now but waking up and recognizing the growing value and the opportunity that's been created, particularly in fixed income would be my advice to investors. The reset has been challenging for many, but the exciting element is that reset is complete, and the return opportunities have become much more compelling and much more interesting.

As investors, what matters to us is coalescing around a base case, but also understanding a wide range of possible outcomes. This is an extraordinarily unusual environment and heading into 2023.

FULL PAGE GRAPHIC: TITLE – Strained Markets, Strong Bonds: Investment implications. SUBTITLE – Our process helps us evaluate a range of scenarios to determine the most likely road ahead. The graphic shows three hexagons with bullets that connect to each other via arrows. The top hexagon reads Scenarios with the accompanying bullets: Soft landing, overheating, hard landing and stagflation. The middle hexagon reads 2023 DM Outlook with the accompanying bullets: Recession likely, Inflation moderating, Policy on hold. The bottom hexagon reads Investment Implications with the accompanying bullets: Bonds are back, Focus on resilience, Opportunities in active.

There’s a wide range of possible outcomes. I mean, there's the soft landing, there is the hard landing, there is the possibility of a continued overheating, and there's the risk of stagflation.

Tiffany gave the base case of moderating inflation, mild recession, mild yet extended recession and central banks on hold. But what's important for us is not investing just for that base case but investing to add value across a wide range of possible outcomes. Building resilient portfolios, utilizing active management, utilizing our investment process, and to be sure recognizing that bonds really are back, the reset higher in yields is creating very compelling opportunities.

Active management will allow for the appropriate deployment of capital to the best risk adjusted returns at any given point and bonds yet again, with higher levels of starting yields, can offer a resilient element to a broad asset allocation and some diversification of broad risk.

Tina: So, looking on that theme a little bit more, can you describe the framework that you and the investment committee and the broader process looking at in terms of when you're thinking about volatility and risk going forward?

Marc: Of course, happy to

FULL PAGE GRAPHIC: TITLE – Proven Framework: Concentric circles SUBTITLE – Expect volatility due to central bank policy to decline, but asset market volatility to remain elevated. The graphic shows a concentric circle framework with the least amount of risk in the innermost circles, and increasing as we move to the outermost circles. The representation of each circle from the inside moving outwards are as follows: Fed funds and overnight repo; Short-term core government bonds and commercial paper; Intermediate core government bonds; Long core government bonds; Agency MBS; AAA securitized products (including ABS/RMBS/CMBS/CLOs); IG industrials + senior financials + munis; Bank capital + high quality EM; High yield + bank loans + low quality EM; and Equities + direct real estate.

PIMCO has historically used a framework of concentric circles really ever since the global financial crisis. And the concept behind the concentric circles is that risk really emanates from the center, which would be Fed funds and overnight interest rates, overnight repo extending out to short and intermediate maturity, treasuries, then asset back and mortgage-backed type securities, eventually out to investment grade credit, and then to higher yield credit levered finance and then to equities, and even real estate. What's interesting about the concentric circle framework from 2022 is that it was the center of those circles that was the source of volatility.

It was a dramatic rise in short-term interest rates driven by central banks that caused the volatility across all financial markets and created that challenging return environment for 2022. As we look forward to 2023, I think it's very fair to say that the center of those concentric circles is not going to be the source of volatility

FULL PAGE GRAPHIC: TITLE – Rising yields a strong case for bonds The vertically-oriented bar chart compares yields across fixed income asset classes bar as of 12/31/21 and 12/31/22; the three asset classes at the top of the chart are Core, which had a 1.7% yield at 12/2021 and a 4.6% yield in 12/2022; Global Agg, which had a 1.2% yield at 12/201 and a 5.2% yield in 12/2022. Agency MBS, which had a yield of 1/7% in 12/2021, and a 4.6% yield in 12/2022; AAA-Securitized, which had a yield of 1.8% at 12/2021 and a 5.5% yield in 12/2022. Those three asset classes have a box with dotted line around them and the box to the right with the text: Prioritizing Resilience, Offer compelling yields and lower risk. Under those three asset classes, the following asset classes are also included: Munis, which had a yield of 1.8% at 12/2021 and a 6.0% yield in 12/2022; Investment Grade Credit, which had a yield of 2.3% at 12/2021 and a 5.3% yield in 12/2022; High Yield Credit, which had a yield of 3.8% at 12/2021 and a 8.1% yield in 12/2022; and Emerging Markets, which had a yield of 4.4% at 12/2021 and a 7.3% yield in 12/2022.

and so once the center of that universe settles down, the concentric circle is just adjacent to the center of the universe, become much more attractive.

You're getting spreads there that are historically wide top decile in terms of their attractiveness. You're getting starting points of yields that are very attractive. You're getting triple A credit quality,

you're getting securitization or hard assets backing your investments. And that to us at this stage of the cycle and at this stage of the outlook look incredibly attractive to us.

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

Text on screen: PIMCO

Disclosure

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 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.

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.

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 is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission.| PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Corso Vittorio Emanuele II, 37/Piano 5, 20122 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, Shanghai, 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other) | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (110) Jin Guan Tou Gu Xin Zi No. 020 . The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication 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 LLC. in the United States and throughout the world. ©2023, PIMCO.

CMR2023-0119-2690209