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Facing Challenges With Flexibility

Fixed income investors have long benefited from a flexible approach, which today may be especially valuable in helping combat current market challenges and further enhancing the diversification potential of bonds. Learn more with Marc Seidner, CIO Non-traditional Strategies.

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Text on screen: What are the some of the challenges that fixed income investors face right now?

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

Marc Seidner: Navigating the current environment will require a more flexible and nimble mindset than perhaps investors have had in the past.

Text on screen: TITLE – What are some challenges facing investors in the current environment? BULLETS – Rates are low, Unprecedented amounts of fiscal and monetary policy, Inflation risks, Potential for elevated volatility

What are some of those challenges? Rates are extraordinarily low. There is unprecedented amounts of policy, both monetary and fiscal policy in economies and markets right now.

Inflation risk exists. It's not PIMCO's base case, but I think as investors we all have to be respectful of inflationary concerns and upside inflationary risk.

Governments and companies have been extraordinarily opportunistic in issuing a lot of debt at low yields with very long durations. Spreads are very narrow. All this could result in unprecedented volatility in fixed income markets, particularly in traditional betas and benchmark oriented portfolios.

Text on screen: Even in today’s environment, bonds retain their role as a diversifier

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All that said, bonds still retain their traditional role as a diversifier. We just need to think a little bit more flexibly and a little bit more nimbly. Navigating around benchmarks and traditional betas, looking for the best optimal risk adjusted returns, thinking globally, and going where the opportunity exists.

Text on screen: What are some of PIMCO’s high-conviction views that flexible strategies can take advantage of?

2021 has been an extraordinarily volatile year in the bond market. Flexibility is key on capitalizing on some of that opportunity.

Text on screen: TITLE – Examples of opportunities that flexible portfolios can take advantage of: BULLETS – Shifts in interest rates, Intermediate-term US interest rates, Select emerging market local currency bonds, Non-traditional spreads, Housing-related assets, Recovery sectors

A flexible and dynamic portfolio could reduce interest rate duration and actually benefit from the rise in yields that took place from the middle of last year through March of 2021.

When rates rose and got to relatively attractive levels, it was easy to pivot and have more interest rate risk in the portfolios, extend portfolio durations. Where one invests in terms of interest rate risk is very important. The intermediate part of the US Treasury yield curve seems quite attractive to us right now, standing in stark contrast to the back end, longer maturity, longer duration bonds, that seem to have very unattractive risk adjusted return potential right now.

In addition to that there is great opportunity in select emerging market local currency bonds that have underperformed recently given increasing inflation concerns and risks, tightening cycles by central banks. And that may create some opportunity to capitalize.

There's also great opportunity in some of the more nontraditional spread exposures. Traditional benchmark oriented credit spreads and credit betas look quite unattractive at this point. But some of the more nontraditional areas look quite interesting as a means of adding what could be substantial value.

In addition, housing related assets can capture the strong technicals and strong fundamentals that currently exist. And last, and probably not least, would be opportunities in some of the Covid recovery sectors, areas that have lagged the recovery more generally. And that can include hotels, retail, airlines, real estate, and debt issued by those companies and in those sectors of the marketplace.

Text on screen: What are the top 3 takeaways for investors on flexible strategies?

Well first and foremost, a flexible and more dynamic approach to fixed income investing in this environment

Text on screen: Flexibility benefit: May help navigate challenges in the current market

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may actually help investors navigate through some of the challenges in the current environment and the pitfalls associated with traditional benchmark oriented portfolios and traditional bond market betas.

Text on screen: Flexibility benefit: Can help investors meet many different portfolio needs

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Second, perhaps a more flexible, more dynamic portfolio could help an investor meet a myriad or multitude of needs that they might have in their broader portfolio construction. That could be liquidity management, could be capital preservation, could be seeking higher levels of income or potential return, all within the context of the traditional role that bonds serve as a diversifier in a portfolio.

Text on screen: Flexibility benefit:  Can pivot toward areas of opportunity

Images on screen: PIMCO trade floor

And then lastly, a flexible more dynamic strategy may help investors pivot more effectively to areas of opportunity. And certainly can help concentrate portfolios in areas where there are much better risk adjusted return potential than traditional bond market betas or bond market benchmark portfolios.

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Please note that this material contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

The continued long term impact of COVID-19 on credit markets and global economic activity remains uncertain as events such as development of treatments, government actions, and other economic factors evolve. The views expressed are as of the date recorded, and may not reflect recent market developments.

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. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations.

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Beta is a measure of price sensitivity to market movements. Market beta is 1.

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