Income, Resilience, and Diversification

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. Thanks for joining us today, Dan!

DAN IVASCYN: Thanks, Kim!

KIM STAFFORD: PIMCO recently released our secular or five year outlook titled 'The Fragmentation Era'. In it we talk about rising global debt levels and how that'll limit fiscal flexibility, while Global Trading Alliances will fragment and potentially alter global asset flows and fuel volatility in the markets. Let's translate those longer-term views into actionable ideas for today. What can investors do on the second half of 2025 to position themselves for these longer-term trends?

Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer

DAN IVASCYN: Sure. Well, I think this year's price action and news flows an example of how uncertain the macro environment is. But I think it's always important particularly within the fixed income opportunity set to remind investors

Text on screen: Yield drives a significant portion of fixed income returns

Images on screen: PIMCO trade floor

that yield or current income drives a significant portion of fixed income returns. When you look at the performance over the course of the last year across high quality bond strategies, you look at mid-single digit even, you know, high single digit type returns, even year to date. Despite the fact that there's been a lot of volatility, a lot of concern around U.S. treasuries, deficits, these types of fundamentals, the returns have also been pretty good. They've been particularly good, if you've had a global opportunity set with non-dollar assets, higher quality emerging markets, doing even better than the U.S. market.

So I think the first point is patience. The second point is appreciating the fact that we are in an environment with significant left tail and right tail risks, and there's going to be a lot of local noise. As an active asset manager, this is exciting.

What we really try to do for PIMCO, clients' to take a long-term orientation, use every tool in the toolkit, acknowledge fairly extreme uncertainty, but try to, you know, find resiliency across portfolios and generate a very, very attractive yield at the end of the day.

KIM STAFFORD: You mentioned that bond markets broadly have been performing well this year and similarly, there are concerns about rising debt levels, particularly related to longer term bonds. So give us the state of the fundamental outlook for bonds. What's changed and what should investors consider?

DAN IVASCYN: Yeah, so there's really good value in global fixed income. Sometimes people yearn for the good old days, so to speak. The pre-COVID days where debt levels around the globe were much lower, inflation was very well behaved and quite low relative to where it is today. The problem back then is there was no value in fixed income markets.

You took a relatively low yield, subtracted a relatively low inflation rate, you almost always ended up with a negative number. Yes, debt levels are higher today, but one of the reasons why you can lend to the U.S. government, to other foreign governments, to other high quality corporate borrowers is because we do have high debt levels, and

Text on screen: High debt levels lead to higher nominal and inflation-adjusted yields

Images on screen: PIMCO trade floor

when you have high debt levels, we in the private sector, get to benefit through higher nominal yields and higher inflation adjusted yields.

So yeah, there's been a lot of talk this year about, concerns about the fiscal picture, particularly here in the United States, when in fact, when you look at the performance of the bond market, you look at where yields are. The 10 year treasury yield, is about where it started the year, and returns are pretty good. Yes, longer maturities have underperformed. And a key theme of ours across portfolios the last couple of years has meant to concentrate our interest rate exposure in shorter maturities. We don't have to take risk in the form of a 30 year maturity bond. We don't even have to take risks solely here in the U.S. market.

So, deficits are high, they're high, in this country. They're not sustainable over the long run. But we do think that over the short term, even the United States running deficits in the mid-single digits are manageable, at least manageable in the sense that we'll avoid a crisis.

We will likely avoid any type of major capital flight. But again, we're not just taking that base case view for granted. We're looking to shield our client portfolios by, again, diversified outside the U.S. and not taking massive amounts of interest rate risk to generate return.

KIM STAFFORD: You mentioned there are some concerns about the outlook for both US long-term debt, as well as the ability for the U.S. dollar to continue its longstanding status as global reserve currency. So what is our outlook on the dollar and US assets?

DAN IVASCYN: The U.S. dollar's going to continue to be the reserve currency over the course of the next few years. With that said, we can certainly continue to see diversification away from the U.S. dollar away from U.S. treasuries, away from U.S. assets, both fixed income equities and other areas of the market.

The U.S. market, the U.S. economy, or at least risk markets have performed extremely well, in both in absolute and a relative sense. When you look at the U.S. dollar, you look at other risk assets here in the United States, they still are expensive versus risk assets or currencies outside the United States. So we do believe that over the course of the next few years, you could see this reversal of us exceptionalism.

You can see outperformance of assets both in the developed markets as well as the emerging markets. And where we have flexibility on behalf of clients, we are looking and are in fact diversifying into some of those areas of the market. So, the United States is an incredibly vibrant part of the world, very, very strong economy with significant momentum.

Text on screen: Technological innovation supports strong U.S. economy despite near-term uncertainty

Images on screen: Data centers

A lot of this technological innovation, AI innovation, is emanating out of the United States despite more near term uncertainty.

We still have a wonderful business climate, you know, here in this country. So it's not as if, you know, we are looking to flee U.S. assets, it's just prudent diversification to try to reduce portfolio volatility and most importantly, increase returns for end clients. And this is true of both the public opportunity set as well as the private opportunity set as well.

KIM STAFFORD: Give our investors a playbook for the second half. What investment opportunities are you most excited about?

DAN IVASCYN: Yep! Patience, avoid the noise, take a global opportunity set into account, and acknowledge that we have more economic uncertainty than we've had in the past. It's fairly symmetric,

Text on screen: Growth can stay strong or even pick up, but the risk of recession remains elevated

Images on screen: Stock market ticker

there's some scenarios where growth can remain very high or even re-accelerate, but recessionary probabilities remain elevated. So, over the course of the last few years, you really haven't had much in the way of an economic shock.

Even during COVID, although we had the economic shock, we had massive fiscal and monetary policy stimulus, it didn't allow the typical cleansing mechanism across much of the corporate sector. So today, given that we have a little bit of froth, a little bit of complacency in the more economically sensitive areas of the credit markets, a real key to active management is trying to maintain an attractive yield while providing significant downside protection.

It's not our base case that we're going to have a recession over the course of the next 12 to 18 months, but risks are elevated, probably closer to 30, 35, 40% versus the typical 20% range. And the great news is that there are resilient, liquid, global areas of the opportunity set where you can achieve a very, very high yield and have the type of downside protection, which won't become apparent until you end up having that economic shock. So it may not happen over the next year or two, but investors should prepare for that and can prepare to do that, not hunkered down in cash or in the highest quality area of the opportunity set. Just again, a good, diversified portfolio with significant downside protection.

KIM STAFFORD: Great! Thank you very much Dan, and thanks to all of you for joining us! We'll see you next time.

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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. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.

This material contains the current opinions of the author 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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