How to Stop Chasing Headlines and Build More Resilient Portfolios

EPISODE:

Stay tuned after the conclusion of the podcast for additional important information. Subscribe for more episodes connecting macro trends to portfolio strategy and visit PIMCO.com for extensive research and resources.

VOICE-OVER:  Welcome to Fixing Your Interest.

Today’s episode explores how investors can separate signal from noise in a market shaped by geopolitical uncertainty, shifting central bank expectations and an evolving economic outlook.

Marc Seidner joins Tina Adatia to discuss the key themes driving investment decisions today.

They also examine the case for duration, the role of bonds as portfolio diversifiers, and where they see the most compelling opportunities across global fixed income markets

TINA ADATIA: Okay. Welcome Marc! Lovely to see you in London on this summer heat wave, but not necessarily a summer lull in terms of markets for sure. There's been lots to talk about. So maybe with that in mind, if we start with the big picture, and there has been, of course the Middle East conflict.

We've had a lot of discussions and market volatility around AI rates going quite dramatically up in the last six months, equity reaching more time highs. So when you take all of those pieces and you think about yourself and the investment committee, all are you guys really focused on right now in terms of themes?

MARC SEIDNER: Well, first of all, Tina, thank you for having me here today. It's always wonderful to visit London. Perhaps prefer it not in a heat wave but it's I suppose if we didn't complain about the weather, we'd have nothing to complain about. Although, as you say, there's plenty to engage in a discussion about maybe complain about occasionally. We've been busy in the investment committee.

There's obviously a lot to talk about. I will say at a super high level, I think we would all around the table, and I think I would say this representing almost all of our PIMCO colleagues that this is one of the most unique interesting opportunity rich environments that I think many of us  have faced in our careers. And I think that's what, while there's a lot to worry about, that's what brings an air of excitement to our investment committee meetings, our investment committee discussions these days.

I think I'd probably summarize it in three broad themes. Obviously, Middle East conflict has been going on for the better part of six months now. So we do spend a reasonable amount of time thinking about pathways either to the risks of further escalation or hopefully the benefits of resolution. Because that really could spark a pretty good period for global financial assets and particularly since yields around the world, particularly for US treasuries are sitting at the upper end of what has been a well-defined range for three years.

That could spark some pretty decent performance in global fixed income, specifically that resolution could spark some pretty decent performance in global fixed income. And so that's one topic. We've had a transition in Federal Reserve leadership from Jerome Powell to Kevin Warsh.

And we spend a lot of time trying to understand what the dynamics will be of   the Warsh led Fed that's got a nice ring to it, the Warsh led Fed and to be honest with you, I think many of us would applaud some of the areas that  Kevin is sort of exploring and pursuing in terms of his leadership. He is seemingly flexing his inflation fighting resolve, which we think is a good thing.

He is questioning why the institution has done things and whether they should continue them into the future by creating this group of committees to advise the Fed. He is stepping away from the notion of forward guidance, which we think is quite healthy for markets in general. If the central bank is gonna tell you what they're looking at, what they're gonna do, then it takes some of the opportunity out of the equation.

And so if we're moving into a different regime that we think that will be quite, it's part of what I said, it's quite a target rich and opportunistic environment  for us as investors. So we spend a decent amount of time talking about the new paradigm or what could be a possible new paradigm at the Fed.

And then the last point I'd make, and I'm sure we'll talk about this a little bit more but as you know, probably most people listening we're rather unimpressed with the generalized level of credit spreads both investment grade and high yield.

They rest at a decade or multi-decade lows or tights. We think there should be slightly higher risk premium given all of the uncertainty, but despite all of that being sort of cautious on generic credit beta doesn't mean that we're not interested in opportunities, we're certainly open for business.

And there, in the last year or so, there have been a really unique set of opportunities where we as PIMCO can use the strength of our resources, the size of our assets under management to lead really interesting and bespoke transactions that from an idiosyncratic basis may us the protection, provide us PIMCO and our clients the potential protection that bond holders should want, while offering very compelling yields and spreads.

So those are probably the main things that we're focused on at the investment committee conflict Fed and unique idiosyncratic opportunities.

TINA ADATIA: I think there are three really good things to talk a little bit more about in the next there's 30 or 60 minutes, wherever we get to. But maybe just a sort of follow up question, you sort of mentioned these three things and then there's a lot of volatility around them.

We have different data print every day, which kind of forces, like forces the market to think where is inflation going or the fact that Warsh is not maybe providing as much forward guidance as what the market had got used to. So how do you kind of take all that and think about signal from noise where, when do you think something's really compelling and different in changing the market versus, okay, this is just noise. I'm not so worried about it.

MARC SEIDNER: Yeah, it's a very good question. I mean, I think we as investors always should separate out the noise or try to lower the volume on the noise and raise the volume on the signal, I think that's certainly been true over the course of my going on 40 year, for your career doing this. Now, as we talked about, the noise is amplified.

There is a lot of noise in markets these days and the transmission mechanisms of the noise are so much faster and the response time has been so much greater than it has been in the past. We think that creates opportunity and we think that creates opportunity, particularly for a firm like PIMCO that has and does and continues to invest in our sort of forward-looking macroeconomic research and views and how that ties into valuation and opportunity.

The good thing about noise is it forces others to make mistakes. And if you have a framework that objectively analyzes what any piece of information might mean, then it's a benefit to an investment platform.

And it all comes down to, does this signals will drive changes in views of the macroeconomic outlook, whether it's growth or inflation. It will change drive, it will change, or it'll drive change in views on valuation. And I think that's the standard. Noise will not change views, longer term views, signal will.

And so, the way the lens through which we separate signal from noise is exactly that. Do we think this, whatever this might be, has a profound impact on our views of our baseline, our base case views for the global economy? Does it change the scenarios and should it impact valuation in the longer term? And I think if we stick to that discipline that the alpha generation and trading and positioning opportunities may be great in years to come.

TINA ADATIA: Makes sense. So then getting into one of those topics and the,  this, as you know, you mentioned the Middle East conflict and obviously that has dominated the airways both ways, good and bad daily from the market perspective. Talk us through kind of what our base cases for growth and inflation given that and also what that means for fixed income markets generally you talked that it could be quite a lot of opportunities off the back of this. So…

MARC SEIDNER: For certain, I mean as you know, and I'll say this and I think you'll probably smile and nod. We don't have a unique crystal ball and I think everyone's crystal ball is a little cloudy as it pertains to conflict and in fact ongoing geopolitical risk. I think our base case, or I would suggest our base case is that there will be resolution to conflict.

And that will take us back to sort of a market that was a market narrative pre-February 2027. Our base case all along has been that geopolitical conflict now is very different than geopolitical conflict in 2022. And that hostilities between the US and Iran are very different than the hostilities between Russia and Ukraine.

The similarities that they led, that both conflicts led to an elevated price in energy and in commodities more or broadly because of supply chain disruptions and the like. So the supply shock is similar. What's very different today is the demand side of the equation. And since you asked about our macroeconomic views, our base case is that growth will continue to moderate.

There are many, even in a resilient economy, there are many signs of weakness. I don't like the use of this K-shaped economy. It was, I liked it a year ago when we started using it. Now everybody uses it, so it seems quite pedestrian or somewhat generic, but the K shape is real and we know that the resiliency economy is being driven by in a very narrow sense by the wealth effect of high income households.

And by the amazing amount of capital investment that's taking place in AI technology by the hyperscalers that masks in the broad data some of the underlying weakness that you see in lower income households where real incomes are no longer growing, which is very different than a few years ago.

And the ongoing weakness in small and medium sized companies in the United States, as we all see through the challenges that the private credit universe is struggling within the business development companies and some of the fundamental challenges in the direct lending market from a delinquency default and other aspects. And so, our view is that unlike 2022, when you had a supply shock to the positive and the demand shock to the positive today, there is a supply shock to the positive that will likely resolve itself. And you see that in the shape of the crude oil curve, right? I mean, near term energy prices are elevated, but longer term prices, whether you're looking at 28, 29, 30, have been quite well behaved. And that ultimately the difference today will be that higher price in the near term will lead to demand destruction.

And you're beginning to see some hints of that in the data. I won't make too much of a big deal about last Friday's employment report, but I think it's fair to say that it was weak out, right? And it was certainly weak relative to most expect expectations. And through all of this, we've seen global bond yields trade up to their highest levels in four or five years.

And we find that to be an opportunity, that range on a 10 year treasury that's been between three and three quarters and four and three quarters percent has held and has been stress tested through a wide range of scenarios, rapidly rising inflation, moderating inflation, central banks, tightening aggressively central banks easing or on pause exceptional growth, resilient growth, K-shaped economy, elevated debt, and deficit dynamics in much of the developed market world and particularly in the United States.

A transition of Federal reserve leadership from Jerome Powell to Kevin Warsh, $60 crude oil, $130 crude oil. So that range has been stress tested and when there is resolution, it's very possible that yields sort of normalize back to the middle or perhaps even the lower part of the range. And so we view that as a pretty compelling opportunity. And what are the implications of or what are the investment implications out of the Middle Eastern conflict?

TINA ADATIA: I think the point you make, I think is an important one. And that the fact that high quality fixed income giving you a yield of four or five, 6% is pretty compelling. And I think the other thing that struck me is you talked about that point around demand and supply and the fact that it's really been a supply shock.

We haven't necessarily seen that demand destruction piece come through so much, particularly in markets. So would you say that the bond markets have kind of taken that inflation worry maybe, or concerns that rates are gonna be higher and we're not seeing that same concern from maybe risk markets from the demand side.

MARC SEIDNER: I think that's right. By the way, you mentioned, we talk about a 10-year treasury at four and three quarter percent, that's a starting point. That's really just a starting point. 'cause as you know, we think we are able to structure high quality liquid public market portfolios that have intermediate duration meaning sort of 3, 4, 5 year average lives that are well diversified globally, are resilient and have been quite resilient even through this period of Middle Eastern conflict.

But again, even with everything that we talked about to everything that we worry about and everything that we discuss and debate and try to create a range of scenario and possible outcomes, if you can build a high quality intermediate duration public liquid, fixed income portfolio that yields 7% and perhaps even returns more than that then one sets oneself up as an investor for pretty decent success. That's a great starting point for an asset allocation. And it does a lot of the heavy lifting and try to help…

TINA ADATIA: And no volatility.

MARC SEIDNER: No volatility, and try to help clients compound wealth over  time. And so, I'm less worried about day-to-day volatility, day-to-day gyrations, day-to-day performance. And this goes back to your separating the signal from the noise. The signal is high quality fixed income delivering meaningful yields and meaningful potential for return.

The noise is market narratives of, oh, I'm worried about inflation, or I'm worried about growth, I'm worried about the Fed, or I'm worried about this or that, or the other thing. And I think that is the true signal that we should all be gravitating towards.

TINA ADATIA: Makes sense. So you mentioned a Fed a few times. And monetary fiscal is at the front of our minds most of the time. So when you think about that, you made some of those comments up front around a Warsh Fed and what that means, many in the market have actually been concerned about the fact, the lack of forward guidance and the fact that this could lead to increased volatility and you actually described it as an opportunity.

So talk about the implications for bond markets given this sort of change in kind of the stance from the Fed and kind of direction there.

MARC SEINDER: Well, as I said earlier, when the Federal Reserve tells you everything that they're looking at and what they're going to do it tends to repress volatility and it tends to repress opportunity for an active alpha seeking or performance seeking fixed income investor. I remember back in the day when I first started this business, the Fed didn't tell you what they were doing at all.

We would all huddle around our teller rate screens at 4.15 on a Thursday, New York time, and they would announce what they were doing with the money supply, and you'd have to take out your divining rod and determine whether or not rates were going up, rates went up, or rates went down, or they left them the same.

And I certainly don't think we're going back to those days, but a little bit more two-way risk, a little bit more, two-way volatility in the bond market is not a bad thing.

And we shouldn't be, investors shouldn't be concerned about it because data is volatile and it's often hard to read that signal. And so if we do get less sort of repression of volatility or repression of opportunity, we think that that will set up markets and active managers for long-term success. And so I don't wanna say we're excited about it, but we think it's good that markets, the Fed shouldn't be a hall of mirrors, right?

Where they tell you what they're gonna do and then the market does it, and then they look in that mirror and say, well, then we're doing the right thing. The market signal and a free range market signal is important for, I think macroeconomic analysis, market analysis, and certainly views on valuation.

And I will say this, I don't mean to be an overt advertisement for PIMCO, although it will sound like an overt advertisement for PIMCO. But in a world of  forward guidance where again, the Fed tells you what they're looking at, what they're going to do; I think there's a lot of other global investors that have let their skill, that let their macro skills to some degree atrophy, and it's something that we've never let, we've never underemphasized or put in a positive light.

We continue to invest in and emphasize, and I think that's gonna be a real competitive advantage for a platform like PIMCO's going, going forward. People, as we said, data is volatile, there will be incorrect signals coming, or there'll be incorrect noise coming out of data that may very well lead investors to overreact or underreact at any moment in time. And we can use our, we can set our compass to true north and try to understand where opportunity rises and capitalize on behalf of our clients.

TINA ADATIA: Do you see, I mean, given we're in Europe here, do you see that happening with other central banks, UK, ECB, Bank of Japan? Do you see the vol in the rate market increasing there as well and sort of more dispersion or…

MARC SEIDNER: Yeah, I mean, a perfect example for it and by the way that this increasing dispersion within markets is also creating great opportunity for global diversification. I'll give an example. When hostilities in the Middle East first started in late February, early March, and if we go back to beginning of the year, markets are pricing for the ECB to remain on hold at 2% for the balance of the year and perhaps longer.

Market repriced rate expectations quite quickly to the ECB for the ECB to raise rates by a hundred basis points, Federal Reserve was expected to cut rates two or three times, and then has now moved to expecting rate fully pricing in rate hikes. Bank of England's even more interesting, right? I mean, the market was pricing two or three rate cuts for the balance of 2026 and transitioned to two or three rate hikes.

And again, given the views that we discussed about 26 being different than 2022, the pass of inflation being less profound perhaps now than we saw in 2022, because the demand side of the equation was much weaker, we positioned to take the other side of a market immediately repricing oh, here we go again.

It's 2022 all over again, energy prices are gonna go up, they're gonna be second round effect. Central banks are gonna have to respond and respond quite aggressively. Now, it's very possible that they, and they have responded, I mean, the ECB has already responded, but when the market is setting the benchmark for a multi move rate cycle, or changing the sign from easing to tightening, that does create some opportunity.

And in many of our portfolios, we position to offset that view and take advantage of what might have been mistake by others or a misread of the outlook from other investors.

TINA ADATIA: Yeah. Know that, I think that makes complete sense. I think the ECB one was certainly one that we saw here and you did see the market kind of pull back a little bit after that as well so certainly, maybe taking the other piece of this, we talked a little bit about monetary, I think it'd be remiss not to talk about the fiscal, what's possible, obviously we've seen yields at the longer end rise, maybe in some countries due to kind of fiscal worries and  other concerns. What's the view there and what can we read from this?

MARC SEIDNER: Well, it's a heavily debated view. I mean, yes particularly in the US debt and deficit dynamics are quite poor. We're running chronic 7% budget deficits, or six and a half to seven and a half percent budget deficits. US debt to GDP just crossed a hundred percent line, which doesn't really mean anything except it the trajectory continues to worsen.

And I think that's appropriately reflecting in a steepening of the yield curve. I mean, there should be a higher term premia for longer term debt globally. And so if you have central banks who may or may not raise rates a little bit, but you have central banks, and again, credible central banks anchoring the front end of yield curves, whereas you have fiscal policy that is increasingly not credible leading to higher, longer term yields, we think that's the right way for the market to price the risk.

I mean, you almost say, well, there's central bank credibility, but maybe there's a lack of fiscal credibility and that should be, that should be an important signal. That's not noise. That is a signal.

TINA ADATIA: Yeah and it makes sense. So when you talk about credible fiscal, there are some areas that have become more credible, like within, I know in your portfolios like your overweight emerging markets. Maybe a  quick check-in on emerging markets.

MARC SEIDNER: Well we, in my portfolio, we're probably running more emerging market local duration, both in terms of absolute contribution to portfolio duration and probably contribution to the risk budget than we have in many years. And in fact possibly forever, we're in this unique environment where it's fair to say that emerging market policy makers, both monetary and fiscal, have been acting more responsible than many of their developed market counterpoints.

And that shows up in the data, right? I mean, emerging market inflation on average is lower than developed market inflation. And we're still getting a real yield premium of about 3% in a basket of emerging market debt and so that is both a fundamental signal and a valuation signal that we can't ignore and that's an opportunity that we absolutely wanna pursue.

Now, emerging markets are used as a moniker for a very dispersed group of countries in a very dispersed group of opportunities, right? I mean, think through a couple lenses of tight monetary versus loose monetary, tight fiscal versus loose fiscal, you know you wanna be somewhere around the tight monetary, tight fiscal quadrant.

Think about even with the escalation of hostilities. There's a different, there's a fundamental differentiator between energy importers and energy exporters. And when you look at it through that lens as an active manager, you get to pick and choose which risks you want to take, where you think you have a fundamental tailwind, even in this broad categorization of emerging markets generally being more favorable or looking even more favorable than the good opportunities in developed markets, but that's where you, that's how you pick where you want to take that exposure.

And it's incumbent upon us as active managers to pick and choose will we have a fundamental tailwind, and where we think we have attractive valuation.

TINA ADATIA: Okay. We did talk a little bit about your portfolio and I know we don't have too long, but I do wanna get through a few more bits. One is really duration and whether, you've talked about high quality fixed income being very attractive right now. I think combining that with things like return seeking assets like merger markets makes a lot of sense.

When you think about your portfolio and the duration that you have in the portfolio at the moment, what do you like and talk a little bit about, you also talked about duration and old-fashioned bond math as well and what's attractive at the moment. So talk a little bit about where you're constructive and…

MARC SEIDNER: Before we get into sort of specific areas, one of the questions that we get a lot these days, and you're across this as well as I am, is the simple question, or perhaps even it's phrased as an observation. I'll phrase the question, will fixed income be the diversifier in a portfolio that it has been in the past?

Because a lot of folks still are scarred or have the muscle memory from 2022 or even folks look back at March and say see we had geopolitical conflict. Equities went down in price, bonds went down in price, and they didn't really help diversify the portfolio. And it's a fair observation to be certain, but at this starting point of yields, it's quite clear to us, this is the old fashioned bond math that you just alluded to us.

It's quite clear to us that when a global investor with a broad asset allocation needs the diversification benefit the bonds have historically provided, they will  absolutely play their role. Risk parity is alive and well, where I think many think it is dead and gone.

And the math, again, that math is simple at a starting point at four and three quarter percent yield it wouldn't be, it's not ludicrous to think, or in fact it's quite reasonable to think that central banks will once again cut short term interest rates, that longer term interest rates will follow, and if 10-year yields fall to two and a half percent, that's a 20% return on a 10-year bond and that is probably in the moment where equities are down 20 or 30% because the cycle has turned.

And that's the type of ballast or anchored a windward that fixed income has historically offered. But I'm quite certain that when investors need bonds and need the diversification benefit, it will absolutely be there. Now what do we like? I mean, as we said, starting point of a 10-year treasury looks pretty good.

One of the great things about, sort of the recent increase in interest rates is we now have positive slope to yield curves at the very front end. One of the structural performance drivers of the active fixed income manager and the good active fixed income manager has been capturing carry and roll down at the front end of the yield curve, take a five year treasury yields 4.5% or so, it rolls down 10 basis points a year, which, so that starting point of yield is pretty attractive, but you get an extra half a point or so of price appreciation over the course of a year as you roll down.

So it actually enhances the starting point of yield, which is again, how we can build well diversified high yielding, high quality portfolios. So the starting point of US looks great. US mortgages look fantastic. Agency mortgage backed securities, a Fanny five has a 5% coupon and a $97 price, it's a discount price bond has a five and a quarter, five and a half percent yield in a world of three and a half percent short-term interest rates or three and five eight short-term interest rates in the US.

What a great opportunity to earn some yield and carry. But then in government bonds, UK, Australia both pick up 30 or 40 basis points versus the US, so about a 5% starting point of yield look quite attractive to us.

And then in emerging markets, countries like Brazil, that's got 14 and a quarter percent short-term interest rates and four and a half percent inflation. That's almost a 10% real yield. Like you and I, you can do that math quicker than I can, but that's a pretty attractive real yield.

And even if you don't share our view that inflation will continue to moderate and we continue to own some as well as a diversifier, you own some inflation protected bonds, 10 year US tip yields almost 2.5%. And it's pricing relatively benign inflation.

But you get it, hopefully you get the sense that you sort of build on this starting point that's attractive, that will have a diversification benefit and you can just sort of keep doing better and better and better. And that's how we structure these high quality resilient, globally diversified intermediate term, high yielding portfolios.

TINA ADATIA: I think that's really important.

MARC SEIDNER: I feel like I should go back to my desk and start managing your portfolio?

TINA ADATIA: No, but you think about that, I mean, the ballast having that ballast and that ballast giving you an income and on top of that, diversification over time and capital appreciation potentially if yields fall, if you get a left tail scenario on the growth side, I think is pretty unique that we haven't seen in the last 10 years. We've seen it, both you and I have seen it in the last 30 years, but certainly in the last 10 years it hasn't necessarily been the case. And then mine finally, going back to those themes that you kind of talked about, we didn't talk yet about credit markets. You've mentioned that credit spreads are sort of tight relative to historical standards and there's, I think reasonably good reasons for that given the fundamentals in many of these corporates look pretty healthy, cash flows look good, but you talked about that K-shaped winners and losers.

So talk to us about the opportunities in credit markets and what you are seeing.

MARC SEIDNER: Well, again, if you think about risk premia around the fixed income markets and in the fixed income universe, you have elevated risk premia in government bond yields. You have elevated risk premia or healthy risk premia in the slope of yield curves. You have elevated risk premia in volatility markets, you have elevated risk premia in currency markets where the one segment where we don't see an elevated risk premia is in generic corporate credit.

And as you say, it might be fine because investors will rely on backward looking analysis and say that fundamentals are exactly fine. Well, we don't have to deploy capital where the conclusion is it's exactly fine. We want to deploy capital where it's good.

TINA ADATIA: Yeah. Well you get paid for it.

MARC SEIDNER: Awesome. We get paid for it. And so we think it'd be healthy if credit investors imparted a bit more disciplined and demanded a little bit more credit spread in general. Now that said, credit markets are disperse and so there will always be opportunities.

We are finding unique ways of, as I said earlier, ways of adding performance and spread and carry to portfolios, looking at bespoke transactions, call it sort of capital solutions within the public fixed income marketplaces where we use our, the scale and scope of our platform, the scale, the breadth of our resources, whether it be capital markets, folks structures, credit research analysts, analytics or, and legal minds, and scale being the size of our platform, being able to speak for relatively large transactions and in those type of bespoke transactions, we're getting paid anywhere from a hundred to 200 basis points of extra yield or extra spread.

That's a compelling opportunity that we can't ignore. And so even though we don't like generic beta, we are finding unique situations where we can do sizable transactions that are delivering carry and performance to portfolios or should deliver carry and performance to portfolios.

Outside of the credit universe there's a wide range of opportunities in one of our favorites is still agency mortgage-backed securities in the United States, attractive starting point of yield, attractive valuation on a historic basis, both outright and relative to corporate credit.

And so here's another example where we're investing in a sector of the market that has higher quality, more liquidity, and more spread, more yield than generic corporate credit. So that, again, that allows us to not have to buy something that we don't think is attractive because there are other opportunities out there that's true for agency mortgage backed securities.

It's true for other securitized segments of the marketplace as well as we've already discussed, emerging markets where we can de deploy capital and get very attractive, real yields and valuation as well. And so the good news is that we're not forced to buy what we don't find to be very attractive because we're active, we're discerning, we're selective and we're differentiated. And those are some of the opportunities that we find extraordinarily compelling today.

TINA ADATIA: I think that's a really great place to end. To be fair, I think that diversification point across fixed income markets is clear, high quality fixed income, providing you that attractive yield, but doing it in a diversified way and having that kind of active approach, I think is super important given what's happening in markets right now. So thank you, Marc!

MARC SEIDNER: It's been an absolute pleasure!

TINA ADATIA: Absolute pleasure! Thank you!

VOICE-OVER: Thanks for joining us on Fixing Your Interest as we discussed the signals shaping markets today, from geopolitics and central bank policy to opportunities across global fixed income.

Stay with us as we continue to navigate an evolving investment landscape. For further insights, analysis and resources, visit PIMCO.com.