Credit Unwrapped: The Active Advantage Across Public, Private, and Everything In-Between

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Welcome to Fixing Your Interest. Today, we’re joined by Christian Stracke, PIMCO’s President, and Rupert Harrison, Senior Advisor to the UK Portfolio Management Team at PIMCO. As fixed income returns to the spotlight, we’ll discuss why active management matters, how public and private credit are converging, and where the best opportunities and risks lie in today’s markets. Whether you’re locking in yields or navigating volatility, this episode will help you position for what’s next.

RUPERT HARRISON: Hello, I'm Rupert Harrison, and I'm joined today by Christian Stracke. We are going to be talking about all things fixed income and why it's such an exciting time in fixed income. So, Christian, we are going to get onto active management. We're going to get into private credit, but let's start with the big picture. So you have been, you've been investing for 28 years. You've been at PIMCO since 2008. So markets have changed.

CHRISTIAN STRACKE: I am that old Rupert, yes.

RUPERT HARRISON: I'm sorry. Sorry to draw attention to that. Markets have changed a lot over that period, but I've heard you say recently that this is one of the most exciting times in fixed income that you can remember. So why is that?

CHRISTIAN STRACKE: Oh, it's exciting across the board, you think about the confluence, all of these interesting things that are going on. You have all of the geopolitical questions, challenges, opportunities. You have the enormous tech challenge and opportunity in AI, the advent of AI investing in AI across the board. You have questions about emerging markets and how they're doing.

You've got the questions around China. I mean, it is a fascinating time. And in the backdrop of all of this, you have rates high. You have high yields coming off of years of inflation, that was too high. Central banks had to increase policy rates to get inflation down, and that creates this opportunity that is not once in a lifetime, but it's once in a generation or once in a career, probably when you get these rates at this level. But with inflation coming under control, or at least we hope so, and we can talk more about that.

RUPERT HARRISON: Yeah. And I guess with fixed income investing, unlike, for example, equity investing, starting yield, where you enter into an investment is like a really strong predictor of future returns.

CHRISTIAN STRACKE: Yeah, that's right. I mean, it's one of the great things that Dan Ivascyn likes to say is that generally speaking, your return is going to be your starting yield. If you're buying a collection of bonds that return about six, 7% today, you're probably going to get six, 7% when you hold them to maturity.

Now, they may go up and down and there may be some mark to market, but that six to 7% is a pretty interesting return profile, especially when you kind of look at equities and how stretched they are. If you look at some other things out there, it's a pretty interesting return profile relative to other things.

RUPERT HARRISON: Absolutely. You talked about that could go up or down. I guess one of the interesting things is it like, what are the scenarios where it could be even higher than that? So we talk a lot, you know, I'm a macro guy from my background.

We talk a lot about that policy reaction function if things go wrong. So if we get in, you know, we are not forecasting a recession, but if we get into recession or a crisis over the last decade, it was governments that are stepping in with fiscal policy, right? Because the central banks had run out of ammunition. Now the central banks have all the ammunition. That's kind of the additional upside for bonds, right?

CHRISTIAN STRACKE: Yeah. Well, although you're careful what you wish for with a recession, if–

RUPERT HARRISON: No, I'm predicting or hoping, but thinking about upsides for bonds, that's when, if the risk assets in your portfolio might be suffering in that environment, if you're in a rate cutting cycle, there's that extra kicker.

CHRISTIAN STRACKE: That's exactly right. You're starting from a level where central banks can cut, as you say, by hundreds of basis points if they wanted to, in which case the returns over the short to medium term could be much higher than that six to 7% that I mentioned.

RUPERT HARRISON: Okay. So that's the starting point. We've got attractive starting yields, and especially as you said, relative to some very expensive looking equity markets. But you talked about this world is an increasingly complex and volatile place. So why is active management so important in this environment and why do you think the evidence for, you know, persistent value added from active management is stronger in fixed income than it has been in equities?

CHRISTIAN STRACKE: Oh, well, we could talk on and on about this. There's been a lot of great work done on this, but actually a lot of it is very simple. I mean, if you think, and I've worked in the credit world for most of my career. If you think about in credit active management, well, active management is finding those companies or those countries or those people who you think are going to pay you back.

It's as simple as that. Passive is, the more someone borrows, the more you lend them, which is completely backwards from how investing should be. I mean, passive investing in fixed income is predicated on the more somebody borrows, the more you lend them, which is absolutely ridiculous.

RUPERT HARRISON: Yeah. And so, but we also talk about, so PIMCO talks about structural alpha in portfolios as well in fixed income. So what are the kind of sources of that sort of structural alpha.

CHRISTIAN STRACKE: Right. So that's another really interesting thing that you don't find in equity markets, but you really do find in fixed income, there are a lot of different things in fixed income where people are particularly risk averse. And so there will be things like, they do not want to touch anything below investment grade.

Now, there may be a very solid company, you know, if you think about Ford Motor Credit for instance, or Ford Motor Company, the entire thing was once downgraded into a below investment grade has been upgraded back into investment grade.

Well, you wanted to own that the whole way through. If you sold when it got downgraded, then you would've lost all of the upside from that. And you could say that there are lots of companies that, they get downgraded, but they're ultimately going to be just fine and you miss that opportunity.

So that's just one example. The other thing to realize is that unlike equity markets which are listed, and that trade on an exchange, fixed income remains mostly an over the counter market. Now, there's lots of liquidity in this market now, lots more liquidity than has been the case in my career.

And yet there are a lot of little opportunities here and there to find bonds that are mispriced, that find people that are forced sellers to take advantage of those small opportunities, which you really just don't find in equity markets. And that active investment allows you to take advantage of some of those structural opportunities.

RUPERT HARRISON: And you talked about that, the being willing to go into what look on the surface like riskier investments to get those high returns. Does that really put the emphasis on the kind of quality of, and the rigor of your underwriting and the platform that's built into?

CHRISTIAN STRACKE: Sure. But you know, I mean, a lot of times it's not taking more risk to get more return. A lot of times it's just doing the opposite. A lot of times it's just finding those unloved parts of the world that may not be riskier but offer a lot of opportunity.

I'll give you one example right now, which is the agency mortgages issued by the agencies, the government agencies in the US right now, they're complicated and people hear that and they think subprime and they think 2008 and this, that, and the other thing. But the reality is that they are very high quality. They are guaranteed by these government agencies, which themselves are supported by the government.

They're very low risk, and yet they're unloved and they trade at spread sometimes higher than triple B investment grade corporate credit, even though they're double A or triple A, depending on how you want to team them. They are very strong credits, but because they have a taint on them still  from the subprime crisis that makes them a little…

RUPERT HARRISON: I've heard Dan, obviously our CIO, so I think it's a great phrase where he says, economies tend not to get sick in the same place twice, which I think is a great phrase. The people, as you say, they think mortgages, they think back to 2008.

But actually the regulatory response and the change in underwriting and regulation since then means that the bulk of this mortgage market, it's actually true here in the UK, but, true also in the US. The quality of that underlying asset is a lot stronger than…

CHRISTIAN STRACKE: It's absolutely night and day. I mean, the de-leveraging that's happened in the housing market in general, and the UK is a great example. I mean, the leverage in UK housing prior to 2008 was pretty extreme. And now it's a much safer market.

RUPERT HARRISON: So agency mortgage is a great example of what I wanna ask about next. because I've been at PIMCO for just six months now, but I'm very struck by…

CHRISTIAN STRACKE: Welcome.

RUPERT HARRISON: Thank you very much. I'm very struck by how the concept of relative value…

CHRISTIAN STRACKE: Seems like much longer than six months, but that's okay. In a good way, right? In a great way.

RUPERT HARRISON: So this concept of relative value, like permeates right through the investment culture at PIMCO, it seems to be a very important, so can you explain what does relative value mean to you at PIMCO? Like, how does that drive that?

CHRISTIAN STRACKE: Sure. It's not just as simple as, well, where do I get more returns? And the question is, where are the best risk-adjusted returns? And if you think about a lot of the strategies that PIMCO provides to our clients a lot of them are about safety. You know, the riskier part of your portfolio is really inequities.

The safer part should be in fixed income. And so clients are expecting that, yeah, it will take some risk and you're not going to enter in this with no risk. But that we should be thoughtful about the risks that we do take. And so how much return are you getting for how much volatility that you might see in the portfolio over time? That's really the question that we're looking for.

Now, that requires a lot, it requires a common framework across everything that we look at. And that framework has got to be quantitative. And you've seen that, you know, in spades since you've joined Rupert over, you know, how much time we spend on building out models, building out stress test models, downside scenario models, all of this type of thing to test just how much risk are we taking? How much return are we getting for?

RUPERT HARRISON: And so basically you can afford to say, basically stay out of those crowded markets where the risk return is less attractive and you’re freer to go where to go where you find something better.

CHRISTIAN STRACKE: That's exactly right.

RUPERT HARRISON: And so it seems to me that relative value approach is most powerful when you have capabilities to go across the full spectrum of fixed income, which is a key differentiator for PIMCO, right? I mean, it's not just, we're not just talking sovereign bonds and then sort of vanilla credit. You mentioned agency mortgages. That's something that PIMCO really likes right now. Emerging market assets. That's the strength of relative value, right?

CHRISTIAN STRACKE: Yeah. I mean, you know, the common saying is when you only have a hammer, everything's a nail, right? You're going to go out. If you are a high yield corporate bond team and that's all you do, well, you're always going to like high yield corporate bonds. And that's, you know, really a pernicious part of asset management and of finance in general.

But the reality is when you do have this integrated approach of teams that are looking across the world and across the capital structure at so many different opportunities, we can say, where do we really find diversified risk-adjusted returns for portfolio construction? That's the beauty of working together across all of these teams in this integrated fashion that we have.

RUPERT HARRISON: Yeah, that makes a lot of sense. So relative value is also something that comes up when we talk about, at the moment, we talk about the continuum between public and private credit, and that's a word that interests me. So what can you explain, what do we mean by that continuum between public and private? When it comes to credit.

CHRISTIAN STRACKE: Yeah. I mean, what we kind of mean by that is that the private credit is not its own thing that lives in its own world and its own silo. Private credit is just a different wrapper of the same thing, which is lending. Private and public credit is lending. And the question, are you going to pay me back?

And how much should I charge you for the risk that you might not pay me back? And what would happen if you don't pay me back? How will I come and lock everything down? So that continuum is just a reflection of the fact that it's really the same thing, but in different strategies and in different wrappers and in different products. And sometimes those different strategies really bump up against each other.

Sometimes borrowers want the option of, well, show me what it would look like if I were to borrow from you in the public markets in a public corporate bond, and what would it look like if I were to borrow from you in a private loan that doesn't trade? What would the difference be in price? What would the difference be in covenants?

What would the difference be in Tenure, et cetera, et cetera. Borrowers are getting more and more sophisticated, and they want sophisticated solutions from their lenders. And a place like PIMCO has got to be able to come and offer both. And that's the continuum, right?

RUPERT HARRISON: And so when we talk about private credit, that really is a catch-all for a huge range of different markets and different kinds of investing styles. So can we unpack that a little bit?

CHRISTIAN STRACKE: It is such a buzzword that is overused right now, but essentially what it is credit that is intermediated outside of the bond market and outside of the banks. So that's all sorts of things that could be your brother-in-law comes to you for a loan or….

RUPERT HARRISON: Doubtful!

CHRISTIAN STRACKE: Exactly. Or it could be what really has been emerging is this whole universe of privately transacted lending, whether it's corporate lending, and that's a big part of private credit, so direct lending to corporate, borrowers. And that's particularly corporate borrowers that are owned by private equity sponsors.

So there's a whole ecosystem of direct lending to those borrowers, but also what's become known as asset-based finance, which is this additional world of consumer lending of residential mortgage lending, which is a big area for us, particularly in the UK.

It's a big area of focus for us of, things like aviation finance or equipment leasing, et cetera, et cetera. So there's this growing universe of things where banks are doing less and less, where corporate bond markets or bond markets in general aren't really relevant, but where private lenders need to come in to fill that void in lending.

RUPERT HARRISON: So private credits have had a lot of attention recently, as you said. So you have talked about cracks appearing in parts of the credit market. We've had commentary about cockroaches, so two particular high profile cases that have been in the news Tricolor and first brands.

Now, PIMCO has had very limited, if any, exposure to those names. Now, is that luck? Is it just good underwriting or did those examples have sort of structural issues that would come up as a red flag in our investment process?

CHRISTIAN STRACKE: Look, there's a lot of talk about cockroaches out there in the credit world, and the question then is, how good is your pest control team?

RUPERT HARRISON: Exactly.

CHRISTIAN STRACKE: Right? So if you didn't have, or you had very little of some of these problem cases when they got into trouble, that's indicative of probably you had a good pest control team and you were doing your work and spending the money, and it's annoying to have to go through your house every month and make sure that the pest control is getting done.

But that's a hallmark of what PIMCO does, is that we have a team of 80 credit analysts around the world where we're constantly revising our views on borrowers, constantly revising our models on how strong is this borrower? Are they weakening, are they strengthening? And ultimately what you can do is get to better credit outcomes.

One of those cases that you mentioned is a case of first brands. Now, PIMCO has owned that credit in the past. But a couple years ago we took a look at it and we said, something's not right here. This is deteriorating, this is weakening. Maybe we should reduce our footings.

And we started to sell that. We didn't think that we were getting paid the amount that we needed for the risk that we were taking. It's again, back to that fundamental relative value analysis that we had. But now, pest control is important, not just before, but after. And now you can imagine every credit investor is calling out their pest control team

RUPERT HARRISON: Lifting the floorboards.

CHRISTIAN STRACKE: Exactly. To see what's under there.

RUPERT HARRISON: Yeah. So I guess, would it be right to just try and sum up our approach to private credit PIMCO? So like, are these the sort of right ways of thinking about it? It'd generally be up in quality. With a preference where possible for like having an underlying asset backing the loan and also a preference where possible, again, not exclusively, but for consumer balance sheets on average rather than leveraged corporate balance sheets. Is that a fair summary?

CHRISTIAN STRACKE: That's right. At this moment, households really interesting, you kind of mentioned this, you know, we're always fighting the last war. We've been fighting the last war for the last 15 years, and households have been de-leveraging, de-leveraging, de-leveraging as regulators have made it more and more difficult to lend to households.

So guess what households have de-leverage consumer credit is tight, et cetera, et cetera. Meanwhile, it's been very easy to lend to corporates. Private credit is boomed, the corporate bond market is boomed, and there's been more and more leveraging in the corporate sector. So right now, fundamentally we think the household balance sheet is the cleaner one, the corporate one is the more problematic one.

RUPERT HARRISON: And I've heard clients talk about asset-based finance as a diversifier where they already have some exposure to direct lending within private credit. Would you expect there to be a difference in the performance of those two parts of the market? If we did get into a real credit cycle?

CHRISTIAN STRACKE: Certainly if we get into a real credit cycle, a recession an actual recession, then we will see real problems down the capital structure, corporate space. These are mostly, whether they're rated or not, they're mostly the quality of a low single B or even triple C type of corporate credit, which is very weak and gets into trouble in a recession. Meanwhile, if we're buying pools of prime residential mortgages, where pools that we buy in the UK for instance are 65%, 70% loan to value, you have that huge equity cushion.

RUPERT HARRISON: It's just, I mean, we have a big, we have a pan-European business in this.

CHRISTIAN STRACKE: We have a pan-European, exactly all around Europe, we are actively out there buying pools of residential mortgages generally with that very thick equity cushion underneath you in a world where there's just not much stress on households the way that there could really be on corporates.

RUPERT HARRISON: Right. So another hot topic sort of ticking off these hot topics that get a lot of discussion, a lot of hot, another hot topic in the industry thinking about private assets is the sort of democratization of access to private assets, which historically have been only available maybe to institutional investors or also high net worth investors with kind of more ways for ordinary investors to get access to this sort of source of returns. How do you think about the risks and rewards from a PIMCO perspective?

CHRISTIAN STRACKE: Well, I mean, you know, I probably have my American biases of democracy is good and, you know, the people in the UK may like.

RUPERT HARRISON: It's not just an American bias.

CHRISTIAN STRACKE: Well, you know, this is a monarchy too though, so, but yeah, I mean, it's, it sounds nice, the democratization of these opportunities. And it is good for household retail clients to be able to access some of these opportunities.

That said, everyone should have their eyes wide open that some of these private credit opportunities are more risky and they are definitely less liquid. They are definitely– you only get your money back when you get paid back by the borrower. So that's the really key feature. They're an exciting opportunity, but whether they work or not in an individual's portfolio really is a question of what's right for that individual.

RUPERT HARRISON: And one of the things we've seen to introduce a little bit more liquidity in the market is so-called evergreen funds in this space. So does that sort of evergreen nature of the funds, does that put more pressure on sort of sourcing an origination of assets? Does that really favor the kind of having the scale and maturity of a platform that means that you can still be picky and choosy about what you're putting in?

CHRISTIAN STRACKE: It doesn't have to, nor should it, but it depends on your corporate incentives, right? So if you are working at an asset manager where there is a demand to deploy, deploy, deploy. Grow those evergreen funds, show the market growth in AUM, then yes, you will have your incentives misaligned.

At PIMCO, we don't have all of those misalignments. We have a medium to long-term approach. We're here with our investors and have been for decades, and we expect to be for many decades to come with that. We can be a little more prudent, a little more measured, and not have the pressure to deploy. But it is a real risk in some of these evergreen funds that managers are trying to build them as fast as possible.

RUPERT HARRISON: And, but does size help in this space?

CHRISTIAN STRACKE: That is interesting though, because size does help. So you don't want to feel pressure to deploy. Yeah, that certainly is, you don't want to bend on underwriting. And we've seen some of that bending on underwriting in some of the default episodes that you mentioned that said, the larger you are, the more you can do these big multi-billion dollar deals where you have high quality borrowers who need you to be able to speak for billions in terms of the lending that you're doing. That does help to have that size. And that's something that we're seeing very clearly in 2025 when that preference for size and scale is really emerging.

RUPERT HARRISON: Yeah, absolutely. So the one final absolute hot topic, we couldn't really talk about innovation and changes in fixed income without talking about AI.

CHRISTIAN STRACKE: No.

RUPERT HARRISON: And particularly about the kind of how we are using, how do you see the sort of possibility for using AI capabilities to sharpen our investment edge and credit insights?

CHRISTIAN STRACKE: Thank you. It is absolutely vital. And if we don't do it, others will do it. And if we're not first, others will be first, and it will put us at a disadvantage. And so there is a lot of focus at a corporate level, at PIMCO right now in how do we build out AI tools? How do we onboard AI tools to do everything that we need to do better?

It's not about being more efficient. It's not about letting people go, it's not about displacing jobs at all. It's about making the people that we have at PIMCO that much more powerful as actors out there in the market, whether servicing clients or making investments.

And that's the reality because there is so much innovation going on with AI right now and PIMCO's not alone in being an innovator with AI, but it's a great tool. I mean, if you think so much of what we do in active management is research and analysis. And if AI is sitting there and helping you turbocharging your ability as a researcher, as an analyst, it just makes you that much more powerful and effect.

RUPERT HARRISON: I mean, the big question out there is how big an impact is this going to have? Like, when we think about the impact of AI on the economy or some of the kind of valuations that are out there, are you seeing the impact, is it theoretical still, or do you think it's tangible now?

CHRISTIAN STRACKE: No. Not at all. And what's really interesting is it's incremental. And so that may seem unimpressive that, oh, well I'm only 3% more effective now than I was before AI. Well, if every year you are 3% more effective, pretty soon it's going to be an extreme jump in terms of productivity and impact for every investment professional. So we're not seeing a radical change in the efficiency of our people, but we are seeing a real impact and we expect that it'll continue.

RUPERT HARRISON: That is fascinating. Well, we have really cantered through the whole range of fixed income investing. It's a very exciting time. There's a lot going on.. Thanks for your time, Christian. And thank you everyone for listening.

CHRISTIAN STRACKE: Thanks Rupert. Thanks everyone.

Thanks for listening to Fixing Your Interest. We explored the resurgence of fixed income, the merging of public and private credit, and why active management is more important than ever. Christian and Rupert shared practical insights for navigating today’s complex markets. Subscribe for more episodes connecting macro trends to portfolio strategy and visit PIMCO.com for extensive research and resources.