Text on screen: PIMCO
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Text on screen: Kimberley Stafford, Global Head of Product Strategy
KIM STAFFORD: Hello, I'm Kim Stafford, and I'm here again with PIMCO Group CIO, Dan Ivascyn, to give you an inside look at some of the recent discussions taking place within PIMCO's Investment Committee or IC. Thank you for joining us, Dan.
DAN IVASCYN: Thanks, Kim.
KIM STAFFORD: So last time we talked in February. Since then, the world has changed dramatically. The war in Iran has driven a surge in oil prices and geopolitical uncertainty. How have markets responded and how has our thinking evolved in terms of the implications for the economy and for portfolios?
DAN IVASCYN: Sure, and it was a nice start to the year.
Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
For the foreseeable future market's going to be very focused on what occurs in the Middle East.
Images on screen: Maritime shipping
If we see deterioration in the situation there, more challenges on the supply side in terms of energy markets, we could see rates certainly trend higher over the short term.
We think that scenario would also be quite bad for risk markets as well.
Text on screen: Stability remains likely, allowing inflation improvement over intermediate term
Images on screen: Gas pump, groceries scanned at checkout
Flip side is if we get any type of stability which we think is still the modal outcome there's a lot of room for inflation to improve over the intermediate term. And you can see a situation where bond yields begin dropping again as well.
So the bottom line is that there's a lot more uncertainty today legitimate, at least short-term focus on the situation within the Middle East in an inflation situation that's going to lead to more uncertainty on the context of a market that offers pretty good value today.
KIM STAFFORD: So, taking a closer look at fixed income, clients are reading the headlines. They're seeing yields rise across the globe. In the US the 30-year treasury has hit the highest levels that we've seen in a couple of decades. So give us some context for how we're thinking about the view on interest rates and yields and what might happen from here.
DAN IVASCYN: Yeah. First point is with a longer term time horizon there's great value in the market. We would've said that at the beginning of the year and now given the inflation shock understandably yields across the high quality area of the market are a bit higher as well.
Text on screen: Strong value relative to inflation and versus equities
Images on screen: Stock market ticker
I think if you look at them in a long term context, real good value in absolute terms, yields today that are well above this, still elevated inflation rate and yields today that look attractive relative to equity valuations as well. So for someone and we're trying to emphasize this across the PIMCO team that has an intermediate time horizon, attractive environment for income or yield generation.
I think the second point is that you have an exciting global opportunity set.
Text on screen: Global opportunities span government bonds, corporate bonds, and local currency markets
Images on screen: European Central Bank, stock market ticker, Seoul city center
It's not just an opportunity set here in the United States there are opportunities across global government, bond markets, corporate bond markets, asset-backed finance markets, local currency markets. So this is, again, an increasingly target-rich opportunity.
A lot of volatility across markets, which creates opportunity for asset management and allows you to generate a pretty attractive high quality spread above and beyond attractive starting government bond yields.
KIM STAFFORD: We hear a lot from our clients who are sitting in cash today asking the question, why should I move into bonds today, given the uncertainty we see, what do we think about that?
DAN IVASCYN: Today, you can move out of cash. You can buy a five year or 10-year maturity type instrument and lock in these attractive high quality bond yields for many years to come.
When you go back through history and look at other energy shocks, they typically quickly, if not addressed quickly, turn into growth shocks on the follow.
And that's an environment where if you're sitting in cash today,
Images on screen: European Central Bank, The Federal Reserve
and now you're an environment of central banks taking rates lower, and most central banks around the globe have said, if we could get inflation under control, they want to get rates lower. That's an environment where your cash rate's going down given some of the volatility in recent years in bonds, it's not the easiest thing to do. But we do think you're getting paid for even incremental duration extension here or up in the current environment.
KIM STAFFORD: So, looking at credit markets, it's pretty remarkable that credit spreads have barely moved in the last few months amidst the volatility we've seen elsewhere. At the same time we've seen a surge in debt issuance related to AI infrastructure. How should investors be thinking about their credit allocations in today's environment as they source returns?
DAN IVASCYN: Equity markets around the globe are near all time highs. Credit spreads in general if you look at index level spreads or average spreads, they're close to all time highs as well. But there's a lot going on beneath the surface. One we are, we think in the midst of the first sustained default or loss cycle in many, many years.
And it's critically important to do really good bottoms up credit work to protect portfolios from what will be higher losses than the market's grown accustomed to. So that's point number one. Be selective
And then the other point is that you have incredible needs for capital investment within the technology sector in particular AI infrastructure related energy infrastructure, it's creating some risks.
It's not a sector where we want to be overweight just given the uncertainty, the volatility, the need to predict how companies are going to make money in this space. But because of the massive funding needs, you can be defensive in terms of overall exposure and unlock tremendous value.
Text on screen: AI infrastructure funding needs enable attractive deal terms, liquidity, and investor value
Images on screen: Data centers
This is an area where you can, given the size of the funding needs and an increasingly motivated set of borrowers, drive transaction terms, pick up spread for taking on additional complexity, create nuance within these structures that could lead to better transactional liquidity than the market would initially anticipate, and in the process, create value for end investors.
KIM STAFFORD: And it sounds like we are a lender of preference because of our size, our process, and our resources to be able to take down this risk.
DAN IVASCYN: It absolutely is an area where we've been able to leverage our size not too dissimilar to what we've done for years in the asset-backed securities in loan market, where we can take advantage of familiarity with structure, active structuring guidance along the way, and being able to pull the interest of our collective client base to drive value, turn things quickly, but carefully from an underwriting perspective, and again in the process generate attractive value relative to other more traditional market opportunities.
KIM STAFFORD: Great! Thanks very much, Dan, and thanks to all of you for joining us! We'll see you next time.
Text on screen: For more insights and information, visit pimco.com
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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. 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. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investments in asset-based lending and asset-backed instruments are subject to a variety of risks that may adversely affect the performance and value of the investment. These risks include, but are not limited to, credit risk, liquidity risk, interest rate risk, operational risk, structural risk, sponsor risk, monoline wrapper risk, and other legal risks. Asset-backed securities may not achieve business objectives or generate returns, and their performance can be significantly impacted by fluctuations in interest rates. Private credit involves an investment in non-publicly traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.
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