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View From the Investment Committee

Higher Bond Yields Create an Attractive Alternative to Equities

Group CIO Dan Ivascyn discusses how fixed income has the potential to offer lower volatility, greater resilience, and better relative value to equities at a time when risk assets look more expensive. Learn more about where we’re seizing opportunities today.

Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

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. Thank you for joining us Dan.

Dan Ivascyn: Thanks Kim.

Kim Stafford: Recent data paint a surprisingly resilient economic picture. Can you share our outlook for interest rates in the global economy and what risks we're monitoring?

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

Dan Ivascyn: Sure. So, the bottom line is that the markets have been romancing a no landing scenario or a soft-landing scenario. We think that's increasingly embedded in the pricing of risk assets and given some pretty significant geopolitical uncertainty, the fact that there's been a lot of tightening that's occurred thus far, that monetary policy operates with considerable lags, we don't think we're out of the woods yet. We still think that there's at least a chance, maybe a decent chance still, of ultimately a recession or some period of weakness in order to get inflation back down very, very close to central bank targets or perhaps even at central bank targets.

Kim Stafford: How should investors think about the trade-off between stocks and bonds given the economic outlook you just described?

Dan Ivascyn: Yeah, so you're absolutely right, stocks and other riskier areas of the investment opportunities set have performed very well the last few months.

But when we look at the stock market today, we see pretty high multiples, pretty low equity risk premium in a historical context in this macro uncertainty.

Text on screen: We believe there is better value in fixed income than in equities

Images on screen: Stock market ticker

We do think that there's a bit better value within the fixed income markets, even some of the credit markets. Stocks have been doing well more recently while interest rates across much of the yield curve have gone higher or bond prices have gone lower. So that relative value proposition between bonds and stocks has only gotten more attractive. So we think, again given this uncertainty, not only can you get attractive relative returns in fixed income, but much more predictable returns as well.

Text on screen: You can potentially build a high-quality bond portfolio with a 7% yield

Images on screen: PIMCO trade floor

We think you're looking at the ability to put together a high-quality bond portfolio with a yield of 7% or so, with a two year treasury yield, pretty close to 5%, and lower risk spread assets offering incremental yield pickup of 1.5 or even 2% above that very high quality treasury yield.

So we do think that that makes a lot of sense within the public opportunity set to think about fixed income, even for investors that have typically had very, very high allocations to equities, we think that there's lots of opportunities to generate equity like returns if you're willing to take even more risk within your fixed income allocation.

Kim Stafford: So given that very positive backdrop for bonds, how are we positioning bond portfolios today and when might investors expect us to increase our interest rate risk or duration positioning?

Dan Ivascyn: Sure. So duration is just the sensitivity to changes in interest rates across a particular investment or portfolio of investments. And as we've talked about for some time, with yields quite elevated, with the curve inverted, meaning some of the higher yields in the marketplace were in shorter maturities, investors don't have to take a lot of interest rate exposure to generate very attractive returns.

Text on screen: We steadily take higher interest rate exposure in index-oriented strategies

Images on screen: PIMCO trade floor

So at these higher yield levels across PIMCO portfolios, we've been steadily taking our interest rate exposure higher. In more index-oriented strategies now, we're approaching more of a neutral type position, if yields go higher from here and our economics views stay similar to what they are today, we'd consider adding more interest rate risk back into portfolios.

So we're rather thinking about more moderate interest rate risk and then using all the other levers that we have at our disposal in terms of the global opportunity set.

Kim Stafford: Great. So speaking of the other levers and the global bond toolkit, what sectors do you like?

Dan Ivascyn: Sure. So over the last few months we've been reducing some of our exposures to the more economically sensitive areas of the market, some of the

Text on screen: TITLE – Sectors that we favor:, BULLETS – Agency mortgage-backed securities, Global rates, Emerging markets

more credit sensitive areas of the market, we've been diversifying into things like agency mortgage-backed securities, we've been looking to diversify some of our exposure globally, taking advantage of comparatively higher rates in certain areas of the United Kingdom. We've also been looking to diversify exposure to some of the higher quality segments of the emerging markets in some of our more full discretion type strategies and we're doing that while maintaining significant liquidity.

So across most PIMCO strategies relative to where we've been historically, we do have a lot of flexibility. Flexibility means opportunity to the extent that we do get into situations where other participants in the market need to raise cash and we can then take advantage of what very well maybe more attractive valuations in certain areas of our opportunity set.

Kim Stafford: So you talked about the positive and attractive yields that we're seeing in bonds and the diversification benefits in bonds. Where else are we seeing opportunities in lending markets today?

Dan Ivascyn: Commercial real estate,

Text on screen: TITLE – Areas of opportunity: BULLETS – Commercial real estate, Residential real estate, Date centers, Life sciences, Non-U.S. assets and currencies

tremendous challenges within that sector, areas like retail or office are areas that have significant secular headwinds, but there are other areas of the market with very, very strong long-term fundamentals.

The multifamily space, anything residential, mortgage or housing related, that unfortunately are dealing with a surprisingly high rate environment.

Then there are things like data centers, other life science oriented investments that have tremendous secular tailwinds tied to the AI revolution, a lot of other technological innovation.

Then coming back to some of the more liquid segments of the market, we do think that this may be the beginning of a more sustained period of outperformance in non-US segments of the marketplace.

The dollars bent stronger in the last few weeks, but if you go back to the third quarter of last year when the dollar peaked, at least locally, we've seen signs of this outperformance both in fixed income markets, currency markets and even equity markets.

Kim Stafford: Great. Well, thank you very much, Dan and thanks again to all of you for joining us, we'll see you next time.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO


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. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Diversification does not ensure against loss.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been 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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