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PIMCO’s Capital Market Assumptions

A positive outlook for bond returns

The post-pandemic inflation shock and subsequent rate-hiking cycle pushed bond yields to their highest levels in a decade. Now, as inflation recedes and central banks have begun cutting rates, high quality fixed income may positively reprice. Meanwhile, risks have risen in other markets: Equities and lower-quality corporate bonds have become more expensive, offering investors little cushion in the event of a correction. Our capital market assumptions (CMAs) suggest that a diversified bond allocation could offer equity-like returns with a more favorable risk profile than an equity allocation.

Five-year forecasts in our latest semiannual capital market assumptions include:

  • An average cash rate of 3.5%, the same as in the fourth quarter of 2023, reflecting our view of normalizing rates with a five-year terminal cash rate of 2.75%
  • An estimated annualized return of 6.8% for U.S. large cap equities, based on the S&P 500 – about 3.3% above the average U.S. cash rate
  • An estimated annualized U.S. government bond return of 5.1%, higher than our expected inflation rate of 2.4%, implying positive real returns
  • Expected risk premia of between 130 basis points (bps) and 310 bps over cash on a foreign-exchange-hedged basis for other developed market sovereign bonds and corporate bonds
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