Higher Yields Mean More Value in Bonds Today
Text on screen: PIMCO
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Text on screen: Kimberley Stafford, Global Head of Product Strategy
Kimberley Stafford: We're getting a lot of questions asking as yields are rising, how can investors know when is the right time to return to fixed income?
Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
Dan Ivascyn: Well, I think it's a good time to return now. It's very, very hard to time markets, but as we talked about earlier, value from a longer term historical perspective has returned to the market.
FULL PAGE GRAPHIC: TITLE – Fixed income now offering attractive starting yield levels. Sub-title – Today’s yields are at a much stronger starting point. The bar chart shows the percentage change in bond yields as measured by yield to worst (YTM), which is the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting. The solid bars show YTM for various fixed income sectors are significantly higher across various fixed income sectors as of June 20, 2022 versus the YTM for these sectors on December 31, 2022, which are shown in the shaded bars. Shown from left to right are: Core bonds (+222 basis points), Agency Mortgage-Backed Securities (+226 basis points), Investment Grade Credit (+239 basis points), High Yield Credit (+403 basis points), Emerging Markets (+273 basis points), Municipal bonds (386 basis points), and High Yield Municipal bonds (+481 basis points). High Yields Munis have the highest starting yield at 9.4%, followed by High Yield Credit and Emerging Markets.
Today with high quality bond yields treasury yields or other government bond yields, somewhere in that three, three and a half percent range, you're getting paid more money if you believe, like PIMCO does, that central banks will ultimately get inflation back closer to their target over the next couple of years. That's a very, very important point. we know in a world like today where there's so much uncertainty, it's going to be hard to time an entry point perfectly, but across PIMCO strategies, we are becoming more constructive about interest rate levels more broadly, and this volatility, it feels terrible living through it and transacting in these types of markets, it's creating the type of opportunity across sectors where not only can you generate an attractive yield without going down the credit spectrum too significantly, you can take advantage of a lot of this local volatility and provide some incremental pickup through relative value trading, through targeting even more resilient sectors.
And again, by doing some of that, you can quickly get your yield level up into the mid-single digits, which from a historical perspective, once again is looking increasingly attractive.
Kimberley Stafford: Great. And just in closing, what advice do we have for investors?
Dan Ivascyn: I would just say, be patient. I tell myself that, we encourage the team to do that as institutional managers. But after the type of negative financial market performance over the last several months, and we're not just talking fixed income or public equities, VC, growth equity, crypto, there's a tendency just to say, I'm done with it, just go to cash. And it would be unfortunate to do that at a time where there's finally more value across the opportunity set. So we do think investors should, if they've left the market, consider returning to the market, if they're in the market and they're having trouble staying in the market, to really try to be patient and weather the volatility, because we think that there will be a significant reward ahead.
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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.
A word about risk: 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. All investments contain risk and may lose value.
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