Investing in High Quality Credit
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Text on screen: Mark R. Kiesel, CIO Global Credit
MARK: We have managed dedicated credit at PIMCO now for over 25 years with a strong track record. High quality bond yields are attractive today. Both absolute and relative. Yields are now near 15-year highs and bonds look very cheap, particularly relative to equities. Importantly, there's a catalyst with economic growth slowing,
Text on screen: TITLE – History suggests investment-grade credit can grow following a Fed pause
Image on screen: A line graph shows the cumulative return, from zero to 24 months, following a pause in hiking of interest rates by the Federal Reserve. The chart plots the return of the U.S. Bloomberg Credit Index on the Y-axis, and the number of months following a pause on the X-axis. The historical return, represented by a dashed black line, shows a steady rise to 31% by month 24, up from zero at zero months. The current investment grade return, represented by a solid blue line, is at 9.2% on 31 March 2025, which is 20 months after the last hike. The IG return is well below the historical average, which at 20 months is about 28%. The chart also shows a current return on cash, depicted as a dashed green line, of 9.1% at 20 months, a figure just below the current IG return. The chart also shows how these low numbers are even below the bottom of the historical range, represented by a shaded area in gray. The historical IG range at 19 months is 10% to 48%, and 10% to 55% at 24 months.
We believe central banks like the Fed are likely to lower rates. In our view, investors won't be able to get these yields one to two years from now.
With a global credit portfolio management team of 40 portfolio managers and 85 analysts around the world,
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PIMCO is uniquely positioned to capitalize on the global opportunities in the public credit markets today.
Text on screen: Jason Duko, Portfolio Manager, U.S. Leveraged Finance
JASON: As Mark mentioned, even within leveraged credit, we're seeing elevated yields today.
Text on screen: TITLE – Growth of high yield & bank loan markets
Image on screen: A line graph shows the growth of high yield and bank loan markets from 2002 to 2025. Outstanding amounts are depicted on the Y-axis, years on the X-axis. The chart displays three metrics: those for high yield, bank loans, and private credit. All three show a steady rise and significant growth over time. In 2025, the high yield market, represented by a solid blue line, shows an outstanding amount of about $1.4 trillion. That’s down from a peak of around $1.6 trillion in 2021, but much higher its level of about $400 billion in 2002. Bank loans in 2025 also hover around $1.4 trillion, where they have plateaued since 2021, but well above their level of $150 billion in 2002. Private credit, represented by a light green line, shows a steeper ascent in recent years, reaching almost $1.7 trillion by 2025, up from around $1.1 trillion in 2021, and about $50 billion in 2002. The year 2022 shows some significance, with private credit surpassing the roughly $1.4 billion level of the other asset classes, never looking back.
We think this is an important trend on a go forward basis as these markets are definitely converging. We now see the private credit market on almost $2 trillion in total size. It's larger than both the high yield and loan market in total size today. And importantly, they still have about $500 billion in private capital that needs to be deployed.
Given that we're seeing limited opportunities in the new issue market today, they're looking to deploy that capital in the public markets and that's having a positive impact in the sense that it's taking out lower rated borrowers and muting the default activity. We think this is a trend that you're going to see on a go forward basis.
MARK: We see significant opportunities today in the global credit markets through active management.
FULL PAGE LIST GRAPHIC – TITLE: Areas of opportunity: Global banks, Select energy investments, Aerospace and defense, Telecom, Healthcare, Utilities
Today we are positioned to capitalize on areas of the credit market, which should benefit from deregulation such as banks and select investments in the energy industry.
We find value today in areas which have secular tailwinds like the aerospace and defense industry given large order backlogs and rising global defense budgets.
Finally, we find select value in non-cyclical such as telecom, healthcare, and utilities, which should offer defensive and resilient characteristics should economic growth slow. We remain defensively positioned and are more cautious on cyclicals like home builders, appliance manufacturers, retailers, and autos given today's poor affordability for home ownership and margin pressure expected from tariffs.
JASON: As Mark mentioned, there are some specific credit opportunities within certain sectors, but we also think ultimately there'll be a new issue counter that develops this year.
However, we do balance that against the backdrop of increased uncertainty come from tariffs, which may ultimately delay these deals to come to the market.
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Disclosure
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.
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 current opinions of the manager and such opinions are subject to change without notice. This material is 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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