Don’t Ignore Your Core: Process and Progress with PIMCO CIO Mohit Mittal

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MOHIT MITTAL: A lot of what we do is like detailed cash flow analysis. Government analysis is roll down carry analysis, structuring work, and then combine it all into correlation between different instruments and then ultimately into portfolio optimization, which sounds a lot more nerdy. And hence, you know, this idea of that, that, that, you know, we are a little more like bond nerds than bond vigilantes.

GREG HALL: Hey everybody, welcome to another episode of Accrued Interest PIMCO’s podcast dedicated to serving financial advisors and their clients. As always, I'm your host, Greg Hall. I lead the wealth management business for PIMCO in the United States. And today I'm very fortunate to be joined by my partner and good friend Mohit Mittal. Mohit is our CIO for core strategies. Mohit, welcome to the podcast! 

MOHIT MITTAL: Thank you, Greg! Thanks for having me! Looking forward to the conversation today.

GREG HALL: It's great to have you here and the timing I think couldn't be better because we've just gotten some news on the Fed. And of course a lot of, you know, what you focus on is rate markets in addition to everything else that falls under your purview. So, we're well timed, you know, to have this conversation, but I did, I wanted to remind you actually in the beginning of our chat here and you may not remember this, but I joined PIMCO in 2017 and everybody was very, very welcoming.

But, you went a step above and invited me over to your house for dinner. And I remember it very clearly 'cause I was alone in Newport Beach, feeling kind of sad and got to have a family meal with you. And so, I was just thinking about that as we got ready, you know, for the podcast here and belatedly thank you for eight years later…

MOHIT MITTAL: I can't believe how fast the time has gone by. It's been eight years. It only feels like, you know, yesterday that we were having that dinner at our place.

GREG HALL: I wanted to bring up that little personal anecdote 'cause it occurred to me, I don't really know that much about your journey at PIMCO. You know, I hit the ground running here, and we've been working all really hard over the last eight, nine years. And I'd love to actually know what, how'd you come to PIMCO? What were you doing before I got here? What's your journey been?

MOHIT MITTAL: Yeah, so I joined PIMCO in 2007. I think that was the time when PIMCO was just starting to see the early signs of troubles in the housing market. I joined as part of our MBA program. You know, we used to hire one or two people across different business schools to come join our portfolio management team. And then as part of the program we would have those individuals spend three, four years rotating across different desks on the portfolio management group.

And the idea was that by doing so you would get familiarity with a lot of different areas within fixed income, such that you can over time take on more responsibilities. And we've continued that program. We still do the same thing 19 years later. And we think that is essential because it really helps us develop that sense of relative value.

GREG HALL: What were your rotations?

MOHIT MITTAL: Yeah. So my first rotation was in the high yield. Not an easy place to be in 2007, I think many of us have now forgotten what the credit cycle looks like. But you know, it was a daily deluge of bad news. And if you are managing high yield portfolios working in the high yield area, it can be quite stressful. We are seeing some of that in the last few days with respect to what is happening in the software space.

GREG HALL: Sure. Yeah. I'm gonna ask you about that for sure. What, just for context, for advisors’ listening, what were the sectors back then that, you know, were of most in the corporate high yield area that were most troubling?

MOHIT MITTAL: Housing? Anything home builder related, that was the center. And recall at that time, there were many of the legacy, you know, companies. I remember one of the first companies recovering was around RR  Donnelley, around, you know, the legacy and then also the legacy Yellow Pages kind of stuff. But the idea was just to spend a year there. And thereafter I moved to US interest rate strategies, so doing treasuries, futures, even mortgages. And then subsequently the third year in US investment grade focusing on, basically call it a little bit higher quality credit, but that blends both credit as well as macro, which I had acquired through my rotation on the interest rate strategies desk.

GREG HALL: Right. So, three disciplines in three years. And you'd credit that I think, with giving you such a well-rounded appreciation of markets.

MOHIT MITTAL: Yeah. I think that really helps. And then over time, just having fortunate to have learned from some of the most experienced investors in each of these areas and then beyond as well.

GREG HALL: Yeah. Did, and so from there if I recall correctly, I think that stint in investment grade led to concentration in that area for you in your career. So talk to us a little bit about the time you spent covering credit, and then how you migrated to core strategies. And then I wanna talk about what core strategies means.

MOHIT MITTAL: Yeah. So this is, call it I think 2009 and 10 focusing on investment grade. And then, you know, investment grade tends to be an important component of core strategies as well. And then having worked in the mortgages as well as in treasury market, having a little bit of that understanding of what a core index looks like, which combines investment grade plus treasury, and then a little bit of mortgage exposure allowed me to at least kind of raise my hand when there was an opportunity to do a little bit more on the core front.

Again, I was fortunate to have been given that opportunity. And then ultimately in 2013, 14 you know, as PIMCO was going through that transition, expanding on that responsibility, further taking on PM one and PM two responsibilities in those accounts.

GREG HALL: Yeah. I mean, that's no, it's really interesting. The method to the madness 'cause the rotation, obviously, I think we all come outta school and you kinda wanna concentrate as quickly as possible. Right. And then when you're younger and you're building expertise, you sort of want to dig in and keep going. But the discipline for PIMCO and for yourself to keep that program running sort of speaks to the, you know, the development philosophy here. 

MOHIT MITTAL: And I think that's an important point because, you know, nowadays when we run that program many a times we experience pushback both from the individual as well as at times from the desk. Because the individual says, I don't want to do this for three years. I wanna get on the desk right away, and the desk says that I want a person that will stay for more than a year. But it's a discipline that we have kind of kept and maintained and encouraged. 

GREG HALL: Yeah, I just trained them. They've finally started to give me ROI and you're taking them away from it. Yeah. Yeah, but it's right. It's, I think like with many things and our CEO Manny is a huge proponent of talent mobility and athleticism, you know, in all disciplines on portfolio management, on the business side of how do we move people around.

So, and today you are a CIO of our core strategies area and foremost amongst our core strategies are our total return strategies, which are so interwoven with the fabric of PIMCO. I'd love it, if you could maybe give advisors a sense of what we mean when we say core. I think you've already started to define it, and then talk about what it's like to be managing total return strategies. You know, when that's the foundational strategy that really gave the firm its origin back in the seventies.

MOHIT MITTAL: Let me cover the second question. First, I think the, because you mentioned kind of the origin of the firm, I think, look, I mean, back in like late seventies, early eighties, what was happening at that time was most people would buy fixed income with a buy to hold mindset. You know, you buy, you clip the coupon, and Bill Gross, you know, as phenomenal as he was, he had a simple, he had a brilliant idea that if we trade bonds we can outperform that passive and that has been the DNA of PIMCO. And in many ways, essentially what he said was that there's so many inefficiencies in the fixed income markets. Simple one would be just taking advantage of the yield curve steepness and rolling down the curve.

GREG HALL: Okay. We have to, let’s talk about that.

MOHIT MITTAL: At some point we can talk about it. But there are plenty of others. But the idea was that by virtue of just actively thinking about trading bonds and having a process and a structure in place, you can outperform the passive benchmarks. And, you know, that's how PIMCO started. PIMCO has continued to do that. And even today, when you look across a range of our strategies, we follow many of the same principles.

GREG HALL: Has that in the time that you've been here or since, you know, as a student of the craft, I'm sure looking back to before your time, managing money, has that dynamic of us versus the buy and hold mentality. Has that changed a lot? Do you find, maybe the question I'm asking here is about benchmarks, but what, let me ask you the question this way.

I think a lot of advisors in dealing with equity markets would correctly come to the conclusion that equity indices tend to be very good representation of equity risk. And that active management and equities is very, very difficult to outperform. That hasn't been the case in fixed income. And you've alluded to our origin story. Tell me about what makes fixed income different. And how that holds true today. 

MOHIT MITTAL: Absolutely! Yeah. So, I think the first and the foremost is just looking at the simple data. So if you look at any long-term data, we have done studies, others have done studies as well. What you observe is that equity managers on average do not consistently outperform a passive indices. Again, large cap equity, generally quite hard. However, in active fixed income, the data is quite the opposite.

So, that's first thing is the data itself says that it has been done and it can be done in a consistent and a repeatable manner.

GREG HALL: And to be fair, and, you know, just for advisors’ listening, I think it's, that's a statistic that we think we're very, very good at this. But, other managers in the fixed income space have enjoyed the ability to outperform as well. It's not unique to us. It's actually, it's more the norm than the exception,  right?

MOHIT MITTAL: Certainly, there's more, certainly PIMCO has done well and versus many other competitors as well, but certainly that's a norm. There, and then that begs the second question, which you asked, which is why is it happened in fixed income. I think, like, you know, we are the, we try to think of it as what process can be built to be able to do that on a consistent basis. Our, the first starting point is the structural inefficiencies in the fixed income markets that are really unique to a fixed income index. I'll give a simple example. 

Let's say you like a company, call it IBM, you like IBM as a company, there is one equity ticker that you can buy or sell. In fixed income there are literally like, you know, 50 to hundred different bonds across different tenures and across different currencies. And they will not trade in perfect unison with each other. Because there will be divergence of buyers and sellers at any given time. Think for example, what happened during the UK LDI crisis.

We were able to find bonds of US companies, I think it was Goldman Craft, a bunch of other companies in GBP denominated currencies that were 75 to hundred basis points wider of USD bonds because the holders who were suffering from the UK LDI situation had to reduce their GBP holdings in those names. So the idea is that these…

GREG HALL: So, we had, so it wasn't IBM probably, but yeah, to take the analogy further, IBM's issued debt in pounds because they've got business operations in the UK and all of a sudden you have a localized crisis in the UK bond market, and you can buy IBM credit risk 25 cents cheaper over there than you get it here.

MOHIT MITTAL: Exactly! So that's a simple example of inefficiency. You know, another is you know, what we would call reliance on rating agencies.

GREG HALL: Okay.

MOHIT MITTAL: You know, time and time again in general you know, the data has shown that rating agencies tend to be lagging indicators of credit performance. We have an independent research process, but what happens in the market and practices that the month a company gets downgraded, many of the passive strategies have to sell at the end of the month because that will move out of the index. So usually, the period, the month when some company gets downgraded is the worst time to sell because passive is selling at that time.

GREG HALL: Right. Everybody already knew it was gonna happen, but because it flicked a switch, you have some automatic selling that happens.

MOHIT MITTAL: Exactly! And then you as active managers can be a buyer at that time and that can be an opportunity. So we call it rating agency based inefficiency. And there are plenty of other inefficiencies.

GREG HALL: One of the ones I wanted to ask you about, if you don't mind us kind of staying on this topic for a little while one of the things that I think is kind of interesting is, you know, an equity index by definition, the weightings of that index of the companies that are considered most valuable. And there can be problems with that.

We have a lot of concentration in equity indices right now, that many investors feel might be risky. And so, but generally, success breeds a larger weighting and inequity index in fixed income indices. I think it's issuance that dictates weightings. And so paradoxically, the biggest weightings are the most indebted companies, countries, issuers, is that's the case, right?

MOHIT MITTAL: Exactly! Yeah. So I think that was gonna come to that. Like, the more debt you issue, the bigger the weight is in the index, and then if you're a passive investor, you're gonna have to replicate that exact weight, even though the company, as you mentioned, is becoming more indebted or even the country is becoming, is running larger and larger.

Deficits, again, it's an opportunity or an inefficiency that as active managers one can take the other side off inequity, becomes challenging because if the company is doing well and its weight is increasing and one runs underweight, then if that company continues to do well, then that can be quite painful for an active manager.

GREG HALL: Yeah. It's, yeah. Well, yeah, I mean, it's very interesting to me. 'cause I do, again, it's sort of, it's contrary to the received wisdom in equity markets. And I do get the sense advisors we talked to, maybe less so today because active outperformance has been so pronounced over the last few years. But there was a moment in time going, you know, three or four years ago where it looked as if passive approaches were really gaining traction in the bond market. And it's, I think it's important to note for advisors that the purchase of an index, it's just a very different thing.

MOHIT MITTAL: I'll give a simple statistic. I think for your advisors, it'll be very helpful. I think most, you know, advisors are working with clients with a longer horizon. And I think sometimes the value of that alpha is not fully appreciated, but that the value of that alpha comes from compounding. So say for example, you know, a client has $10 million invested in a passive fixed income strategy.

Let's say an advisor moves them to an active strategy, and that active strategy outperforms the passive, say a hundred basis points over the next 20 years. Let's say that happens, the value of that 1%, a hundred basis points of incremental alpha on a 10 million initial investment is five and a half million dollars, right? So just by doing this simple switch they're able to create a meaningful value for their clients.

GREG HALL: Yeah. At the power of compounding. Alright. Well, let's, this stuff is, I mean, I, we could nerd out on this for hours, but let's, I let's maybe get back to the core, yeah the core strategy. How do you think about core's role in a portfolio? And I'm conscious, and I'm asking you this at a moment when markets, maybe, I say maybe, you'll know better than me, but, you know, we've been on, we've been in the everything rally.

Right. We've been on a binge in equity risk, in credit risk and I think of, a lot of what you do is a little bit of like the antidote to some of that. So I don't mean, I'm sorry, I'm leading you down the path. But tell, let's talk about how you see core strategies fitting in a portfolio.

MOHIT MITTAL: Yeah. So I think the way I think about core is, core as a defensive engine in a multi-sector portfolio. And I think that's kind of the key. It essentially serves three key purposes. First is income generation. On that front, you know, currently the yields are around five and a halfish percent. We can construct a well-diversified portfolio that looks very, very attractive from that income generation objective perspective. Second is the diversification versus equities.

I think on that front again, you know, many investors have been, call it negatively influenced by what has happened in 2022, when what we saw was equities declined and fixed income declined as well. And hence, there is a view that the correlations are broken. And our view on that is that the correlation has and will remain a function of inflation. When inflation comes down towards the central bank's target, correlations start to become negative. You've seen that in the last couple of years when there have been big episodes of equity drawdowns, for example, the Silicon Valley Bank period, the Japan carry unwound in 2024, or even the Q1 of 2025 when equities declined, fixed income, had nice positive returns. So to us, that value of the diversification versus equities, that value is also enhanced for core fixed income at the moment.

GREG HALL: Yeah. And so, as I understand it, I mean, the traditional relationship, obviously, when the world gets nervous about risk seeks safety in bonds that's always been the relationship I think that advisors count on to insulate them against equity downdrafts in 2022 to quite an aberration where you saw meaningful downdrafts in both equities and bonds. How, to what degree does that stand out against history?

I think it was one of a kind Peter [UNCLEAR] but it was not unique. And that's the point that I would highlight that whenever inflation has been meaningfully higher than the central bank's target, that behavior has happened. So, 2022, again, we are accustomed to looking at the data for the past 20 years when we have not had a bout of inflation.

But if we go back to, like, you know, seventies periods when we had that inflation, you had seen that kind of behavior where both equities and fixed income declined. But where we are today, we are, you know, in the inflation that is firmly below three, our view is that we are likely gonna finish by the end of the year closer to two and a quarter percent on inflation. And you know, at that time, fixed income starts to provide that nice diversification versus equities.

GREG HALL: Okay. So I, so income generation diversification,...

MOHIT MITTAL: And the third I was talking about, just as a capital preservation. And again, with the current 5.5% yield, it requires yields to go higher, like almost 125 basis points for us to see a negative return in fixed income.

GREG HALL: So, we're getting paid 5.5% -ish, depending on portfolio construction. And your prevailing yields in the market need to move, 10-year has to go, you know,...

MOHIT MITTAL: Five and a quarter percent, five and a half, whatever.

GREG HALL: Yeah, I got you. 

MOHIT MITTAL: And I think the hurdle to do that is incredibly high. When inflation is coming down, we think likely, you know, we are gonna be in this near current levels of 3.75 to 4.5% on the 10-year. So I think that capital preservation aspect is quite important. And then I would make the comparison versus cash as well as versus equities. So if you compare versus cash, you know, cash yields are at 3.5%.

They're going down, I think the central bank is gonna cut rates. We can debate whether two or three, but likely moving lower. So over the next three years, you know, likely return on cash will be somewhere in the 3% range. You can lock in almost 250 basis points above cash if you move from cash to high quality core fixed income. So that's kind of the comparison versus cash.

And then when you compare versus equities, you have to keep in mind that the starting valuations in equities are incredibly elevated. Cyclically adjusted PEs are near 35. And whenever you have started with these valuations, again you know, this time can be different. But on average, the median return in equities when you have started with this valuation has been near 0%.

And the reason is because over a subsequent three year period, five year period, there can be multiple equity, you know, valuation correction, and we can talk about kind of, what could be the drivers. I think AI, all that, we can talk about that.

But over the last 50, 60 year data that's what the data would tell you, which means that when you look at fixed income, five and a half, 6%, you compare it to near 3% cash, you compare it to equities, which could have a five, 6% return, but unlikely too much high with a meaningful downside. Fixed income looks pretty attractive on a standalone basis.

GREG HALL: Yeah.

MOHIT MITTAL: And then relative to cash and relative to equities.

GREG HALL: Yeah. And do you, I mean, one of the things that we've observed in our universe is equities have had such a good run. And I think advisors and all congratulations to them have made a lot of money on behalf of their clients. But portfolios have become, you know, a little, possibly a little bit out of balance. You know, we talk about 60/40, a lot of people use that as a rule of thumb, 60/40 is long gone. I mean, I think, you know, average advisor portfolio is much closer to an 80/20 or 85/15 at this point. And I suppose it wouldn't surprise anyone that the fixed income manager is recommending a return to a more, you know, balanced approach. But that's what I hear you articulating.

MOHIT MITTAL: Yeah. And again, I think, like you're absolutely right. Like, you know, people would discount what we would say on that because we are a fixed income manager. But I think we should, people should do their own homework and see what does it take for equities to deliver north of 6% from here on.

Basically right now the earnings expectations are about 14% year on year growth. Can it happen? Of course, it can happen. But then and I think when you look at the equity market composition, you know, you have the big AI related hyperscalers as a big contributor there as well.

We should, you know, when we look at long-term history on any big CapEx cycles, so, you know, I was looking at the data going back to even the railroad period in the 1800s, even the auto related investments in the early 1900s electrification system, even the more recent ones around you know, the telecom fiber CapEx cycle.

Again, these technologies are in place today, and they are very, very successful. But along the way, there have been a significant amount of consolidation. Significant amount of basically, you know, we would call it over investment. And which leads to some consolidation. So would we be surprised that over the next three to five years there is some consolidation, some correction?

Absolutely! That does not mean that this technology will not be successful in the next three to five years. So, you know advisors should, should at least recognize some of the risks there. And this is before even we introduce any kind of geopolitical, before we even introduce any kind of growth related risks.

GREG HALL: Yeah. No, it's, I mean, it's fascinating! The, I think any advisor listening to this, it’s probably very conscious of that dynamic. It's been well discussed in the financial press and, you know, and I've listened to, you know, odd lots and all the podcasts, you know, that we all listen to.

And they've done a really nice job, sort of presenting, you know, the positives and negatives and some of those historical examples, which I think are so interesting. And yet, the everything rally, you know, continues. And it really, it's a little bit of a paradox.

I suppose we've seen metals enjoy a bit of a round trip off late and crypto has been maybe a lonely story, but one of a little bit of capitulation on holders there. Maybe we should talk about economic outlooks and in light of the President's announcement about Kevin Warsh. Anything in that announcement that alters our relatively benign view of macro in the next six to 12 months?

MOHIT MITTAL: Not really on that standalone basis as far as that announcement. I think generally you know, Dr. Rich Clarida has kind of given us a very good insight into kind of his assessment of Kevin Warsh and, you know, very orthodox from a monetary policy point of view, credible from you know, prior experiences. And then other pluses include, you know, good relationship with the Wall Street, given experiences at in banking as well as through a large family office management, and then also good relationships with the tech industry given the Stanford connection. So, I think that provides that credibility as the Fed chair.

Of course, I think the market will be focused on the fact that as somebody appointed by President Trump and President Trump wanting lower rates, how would he be influenced by President Trump's thinking? I think you know, that certainly that's gonna be in the minds of everyone. But on a, if you look at it from a, you know, standalone individual basis quite credible.

And something, and as someone who would likely follow the data, and I think from that point of view, our view is that probably two cuts this year. And then there's a scenario where there's a third cut that can happen, but unlikely to see too much more in the very near term.

GREG HALL: You don't make too much of his reputation for Hawkishness. That, of course, was sort of the immediate headline reaction to the selection. 

MOHIT MITTAL: I think the reputation for Hawkishness stems from the views around balance sheet or the QE. But offsetting that is also, is somebody in who, in the more recent history, has talked about needing lower rates because of possibly lower inflation due to the supply side reforms that he believes are gonna lead to lower inflation.

So there is that aspect of a possibility of a lower balance sheet combined with the possibility of viewing or vouching for lower interest rates. So you can kind of offset that a little bit, you know, if the balance sheet, if the focus is on reduction on balance sheet at the margin, you could say a little bit steeper curve, but not clear that, how much of that would be.

And then of course, we have seen time and time again, you know, when it's easier to say things when you're not in the seat. We have all changed our minds once we get into hot seats, you know, so I wouldn't be surprised you know, him, given his, the credibility of the individual focusing on the data and trying to do what is most optimal for the US economy.

GREG HALL: I wanted, I'm curious, you sit on our firm wide investment committee in addition to your direct portfolio management responsibilities, as you all talk about Warsh's potential, we'll say potential, but you know, his nomination and his candidacy for the Fed, and as you look at fiscal policy and you know, and gaze out, you know, kind of along the frontier of rate strategies that you look at, tell us what you can about sort of internal back and forth about the shape of the yield curve, the, you know, the reaction of the long end to both monetary and fiscal policy. I'm just, I'm, 'cause there's obviously, there's a fair amount of change going on right now, so…

MOHIT MITTAL: Yeah, so, and in fact, the shape of the yield curve has been a big topic of debate internally for the past three, four months. I think just to give the listener some context about, call it a year, year and a half ago PIMCO was running a pretty sizable curve steepener, basically overweight to the five year point underweight to the 30 year point in the US.

At that time the shape of the curve was incredibly flat. The five year versus 30 year was close to zero. And our views were that you know, the sustained high deficits combined with possibly intervention at the Fed should over time steepen the curve. And we saw that happen in the, call it the first nine, 10 months of 2025  so much, so that by October, November of last year the curve became, the five thirties curve became 120 basis points.

And around those valuations, I think many of us, or few of us within the investment committee started to kind of think about other scenarios as well. You know, recognizing that the fiscal picture hasn't changed a whole lot you know, we are in the backdrop that we are, you know, again, the intervention at the Fed by virtue of a verbal intervention likely continues. But the shape of the curve has shifted quite significantly.

Also, when we look at the competitor positioning, it started to look like a little more of a consensus positioning at that time relative to in the beginning of 2025. And then there's also a possibility that given the shape of the curve is so steep, the term premium is so high, there's a possibility that treasury can adjust its issuance patterns over the medium to longer term.

In recognizing all these scenarios many of us, or few of us in the investment committee felt that we don't need to have as much of a curve steepener in the portfolios. So what we have done in core strategies is just reduce that magnitude depending upon the strategy to either closer to neutral or to a much smaller steeper and I think that's where we are today.

GREG HALL: Yeah. It's interesting. And you know, I think the temptation is to think of the back end of the yield curve as a sort of a monolithic referendum on fiscal policy on too much spending in Washington and the potential deterioration of US credit risk over time. And you've just casual, like, so you've just walked through four or five other inputs to that shape that guided our decision making. It's a lot more complex than the one issue.

MOHIT MITTAL: I think the simple thing is the valuations, like, just to give a simple number, you know, 10 year forward, 10 year treasury yields widened to 5.8%. So effectively that's a pretty high number if you think that…

GREG HALL: This is the tenure as measured 10 years from now.

MOHIT MITTAL: Ten years as measured, 10 years from now. So if we believe that the neutral policy rate is closer to 3% then the market is already pricing insignificantly the risk of some form of fiscal deterioration, because it is saying that in 10 years, either the Fed funds is gonna be meaningfully higher or the term premium is gonna be meaningfully higher.

So again, this is not to say that the curve cannot steepen from here. It just recognizing that the valuations have adjusted and there are other factors at play as well. So just reduce the conviction level, which, you know, as active managers is something that we do on a regular basis.

GREG HALL: Yeah. I kind of lured you into this more technical conversation about the shape of the yield curve, because I wanted to hear you talk about process. I know it's incredibly important to you, which isn't unique at PIMCO, but it's a real focus of yours. And I was hoping maybe you could walk advisors through your investment process.

What do you think are the key differentiating points? And I don't mean this as an advertisement for what you do or for what we do, but, you know, I always think it's fascinating to hear an experienced investor walk through what matters to them recognizing that there's more than one way to win. But, but if you wouldn't mind sharing. 

MOHIT MITTAL: Yeah. So I think what we as an organization, what we are trying to do or what we have done is essentially build a process that will help us deliver alpha in a consistent and a repeatable manner. And our framework is centered around three things. We start with the structural inefficiencies. We touched upon a couple of those earlier on in the conversation. But the idea is that we go to all of our specialist desks and we say that assume your views are not too dissimilar from the market.

Can we still do things that will help us outperform the passive indices because of the inefficiencies of those passive indices? So that's our first layer. The second layer is all of our active thematic views. So this is where we do a lot of time, as we spend a lot of time on the macro research.

We have, you know, 14 different specialist desks. We have a team of 85 analysts. We have a team of portfolio optimization team and we'll use all of those inputs to look at active views and then construct an optimal portfolio such that those thematic ideas can deliver excess return to the portfolio. And then last, but not the least, is what we call opportunistic expressions. And the opportunistic expressions is basically trying to use volatility as a source of opportunity.

And in order to do that, one needs to have the liquidity. To us the value of that liquidity is, it provides us the optionality to change our mind. The liberation day volatility is an interesting example. We were not anticipating that tariffs will go up to the number that was announced on the billboard. We were expecting the tariffs will go up, but not to the degree that they were announced on April 2nd.

The result was extreme volatility, severe dislocations in plenty of markets. But again, by having that initial construct of trying to be opportunistic, having the liquidity to be opportunistic allowed us to take advantage of some dislocation in the mortgage market, in the swaps market  that nicely helped us over the course of the year, but that's the framework. Structural inefficiencies, active thematic, and then being opportunistic whenever markets give us that opportunity.

GREG HALL: How do you think of the contribution of the individual versus the contribution of the team? How do you harness so much of the idea flow that's rolling around in a firm that's as big as this one?

MOHIT MITTAL: Every individual is incredibly, incredibly important to us. And the way we kind of think about is that, if every individual does their job well we will have plenty of ideas that we can deploy across portfolios. So that's what we are constantly focused on. But it also means that we are not dependent upon just one individual or just one portfolio manager.

And I think that's kind of the big important thing for us that it's less to do with the key man in any individual key man or key woman in any individual strategy. Always have that team oriented approach that relies on all these individuals and then hold all these individuals to very high standard, such that they are focused on generating those ideas. You know our role as CIOs always is to constantly encourage those ideas.

What we are trying to do is bring individuals, you know, the, on all the specialist desks, you know, highlight what opportunities they are and again, a flat structure allows those opportunities to be shared across the organization, you know, last year's, you know, the example of some of the large AI related transactions that we did are interesting examples of the work that is done from a bottom up perspective that can be quite meaningful to the aggregate organization.

GREG HALL: No, that's interesting. So I mean the meta transaction that we've been in the press on and our folks have spoken about publicly the origin of that from a, I'm interpreting or, you know, interpreting from your remark that, you know, was the origin of that from a desk, from a credit desk that was looking at the space. 

MOHIT MITTAL: Yeah. Origin from a, you know, specialist desk, it comes to the IC, IC provides feedback, what kind of structure IC provides guidance on levels. Specialists desk then works with the origination and the structuring team to implement and then ultimately, if we are able to get the terms then that we are looking for then certainly we can participate.

At times the deal, other individual desks will do a lot of work, come up with ideas, and then we may not think it's as appropriate for the portfolios. So we certainly at times will have you know, will make that decision as well.

GREG HALL: Sure. Not every idea exactly is right for every portfolio, not every idea is right. But I do think, you know, I think sometimes we all fall prey to this notion that fixed income is all macro and all rates and all divining the intentions of the Federal Reserve, when in fact, what you're describing is actually quite a trickle up process of individual ideas sort of forming a…

MOHIT MITTAL: Yeah. So I think I'm reminded of a quote, which my co-portfolio manager on the core fixed income strategies uses Qi Wang, she calls ourselves as you know, born nerds. And…

GREG HALL: Accurate.

MOHIT MITTAL: I think we've all heard of the term born vigilantes. I think you know, certainly you know, the, and the framework around bond vigilantes is that, you know, bond managers who tend to be born vigilantes focus a lot more on macro. I think that is very, very important to us.

Macro is certainly a big part of what we do, but a lot of what we also do is like detailed cash flow analysis, covenant analysis, roll down, carry analysis, structuring work and then combine it all into correlation between different instruments and then ultimately into portfolio optimization, which sounds a lot more nerdy. And hence you know, this idea of that, you know, we are a little more like bond nerds than bond vigilantes.

GREG HALL: Yeah. No, it, look, it takes a little bit more time to explain than you know, your typical story stock. But, I think our attitude is, has been, as you said, create a process that reliably produces outperformance over time and try not to get carried away with the stories of the day.

One of the things  that you mentioned was the way that we try to use volatility as our friend, and again, this comes at a time which may be a crossroads for markets where I do think a lot of advisors out there have benefited tremendously from a sort of lack of volatility. We had financial repression in debt markets by the Fed,  we've had an equity market that with a few hiccups has been kind of straight up into the right.

And then of late, you know, some of the most popular products in our space have been private credit products which have a method of valuing their assets that creates a very smooth profile which may or may not conform to the actual movement of risk inside that portfolio.

So let me, before we talk about private credit, I think you're uniquely positioned, given your credit background, and, to maybe just sort of talk about how you think about credit right now as tight as it is. And then, I'd be really curious to get your take on the private credit space particularly as it relates to its inability to use volatility as a weapon and what that might do to a process in that space. And apologize if that's a really open-ended question.

MOHIT MITTAL: No, that's good. So I think first, as a credit as a whole I think generally, kind of our view is that we are seeing signs of complacency in parts of credit markets, particularly the lower quality credit markets. I think as you alluded to over the last 15 years what has happened is that volatility has been low, and then even across credit, the default cycle has been almost non-existent.

And in fact, anytime there has been any kind of stress central banks or the fiscal authorities have come to the rescue so much so that when you look at the period post GFC from 2009 to 2024, that 15 year period is really, really unique relative to any period since the high yield or the levered credit market started in the sense that the excess returns have been exceptionally high.

And if you look at the data from 1982 to 2009, the excess returns in high yield were closer to zero to 0.5%. Because defaults would eat away your excess returns, whereas from 2009 to 2024, it's like almost four to 5% per year, excess return, excess return being excess of interest rate risk and excess of default losses.

GREG HALL: And of course, the, sorry to interrupt, but the pattern from 82 to 2009, I'm just, I’m thinking back of over my childhood, but you know, we're talking about the Michael Milken, junk bond and then savings and loan crisis… 

MOHIT MITTAL: Then the LTCM, the Asia crisis, and the.com and the tech bubble, all of that.

GREG HALL: Right. And then finally the financial crisis. And since then, really nothing that has… 

MOHIT MITTAL: Exactly! So that's the backdrop. And what that backdrop meant was the idea that complacency, which is credit is safe and more and more inflows into more of the levered credit strategies.

GREG HALL: I suppose if you were holding, you know, junk bonds in the eighties, right, you were ticking along with no losses until all of a sudden you gave back all of your returns. I mean, that's just the math of…

MOHIT MITTAL: So basically if you look at, from 1982 to 87, or until the first half of 87, you have strong excess returns, and then you have a one year period which ate away a big portion of your excess returns.

GREG HALL: Yeah. Yeah. Really ugly. Yeah.

MOHIT MITTAL: Then you have three years of good returns, and you have the Drexel situation right away. So that was kind of the cycle that we went through. So that's where, kind of, that's what we mean by complacency. And you know, what that means is more flows, but then also the underlying leverage has continued to increase on the companies.

Because they're able to borrow because there's so much demand to deploy capital, they're able to increase leverage as well. So where you have today is, you know, initial conditions were leverage in levered credit, again, I'm referring to not to the high yield market, because what has happened is many of the more levered companies have shifted either to the loan broadly syndicated loan or to the private direct lending markets, high yield market actually has improved in quality.

GREG HALL: Right.

MOHIT MITTAL: So you have leverage shifting to the broadly syndicated loan as well as to the private market. And then the other is which leads to credit deterioration, but then the other also is the sector concentration within that. So what has been happening there is the growth has been in the, call it the software and the healthcare services space.

And I think we talk about AI, but that's one area that certainly can be negatively impacted through kind of the growth in AI or the developments in AI that we are currently seeing.

So in our view, you know, likely on a go forward basis, if we think about it next three to five years, we think excess returns in those markets, the levered loans, as well as in the, call it the broad, as well as in the private direct lending space, would be much lower than what the initial spreads or the initial yields might indicate.

GREG HALL: Is the software concentration, is that unique to the syndicated loan market in the private debt market? Or is that also reflected in high yield and investment grade?

MOHIT MITTAL: Much smaller. So, even the broadly syndicated loan is smaller, so I think then if I have my numbers right, it's about just under 10% in the broadly syndicated loan. It gets to about 15% in the, call it, you know, non-traded BDCs and then starts to go towards 20% or even higher in some of the private funds, in the private direct lending funds.

GREG HALL: Yeah, yeah. Then I've seen the 25% numbers. And look as, I mean, as we have this conversation the market software companies are trading off extremely aggressively today and taking with them, interestingly enough, a lot of the private focused asset managers who have these big credit portfolios or maybe private equity portfolios built during a time when software as a service has been such a prominent theme, and then all of a sudden AI comes along and puts those business models at risk.

And, well it's interesting, I mean, you know, you mentioned how you started your time here at PIMCO at least in the midst or the very outset of a crisis. I started at Goldman Sachs in 1998. The first thing that happened when I got there was that long-term capital had its, you know, difficulties and that had led right into the Russia crisis and which was very difficult for US financial companies.

I try to remind some of the young folks that come join our firm, there's nothing better than starting your career in the midst of a crisis for just a helpful education in what can go wrong.

MOHIT MITTAL: Absolutely! I think it teaches you a lot.

GREG HALL: Yeah. Yeah. And it's oh, maybe that's a good place to end the conversation, to be honest. No, that's a down note. Let's not do that. So when you, when you think about, so the, we've talked a lot about excesses in the equity markets. We've talked about, you know, maybe a little bit of complacency in the credit markets. When you think about going on offense in core strategies, recognizing it's a defensive posture, but what do you really like out there? 

MOHIT MITTAL: Yeah. So I think the few themes that we like, we still like the agency mortgage theme. We have had an overweight that has performed very well.

GREG HALL: Even now that the agencies have come out to purchase some more. And we still think there's value there.     

MOHIT MITTAL: There's still value, just not to the same degree as it was. So we've reduced the magnitude, but we still like it. We still like senior structure products, you know, triple A ABS exposures, triple A CLO. We've shifted a little bit of our US duration to outside of the US, so opportunities in Japan, in the UK, in Australia.

So for example, like, you know, Japan, 30 year government bonds, which trade at 3.7% hedged back to the US about 6.5%.  Look quite reasonably attractive. Australia, around 4.9% looks reasonably attractive relative to the kind of the US rates.

GREG HALL: Is that Japan position another example of taking advantage of some volatility in the market? 

MOHIT MITTAL: Yeah exactly. I think we have seen that in the last few weeks. We have seen pretty significant volatility there. And our team has done a wonderful job in helping us, you know, get some exposures there. And our thinking is, again, it's not like we think this will work necessarily this year, this next month or the month after.

If you recall, in our core strategies for a couple of years we were running underweight in Japan. We were running a short duration position in Japan, and at that time, the Bank of Japan rates were zero, and our view was that Bank of Japan will have to steadily hike rates. So, you know, late 2024, early 2025, we covered that short as rates moved higher and now the valuations are looking particularly at the long end looking reasonably attractive.

So we just started to build a small position there. You know, as I talked about, Australia, UK as well, a little bit of EM exposures. Again you know, based upon the work that our EM team has done across the interest rate space as well as across the currency space. So those look interesting to us.

And then,  at the finally, in the credit markets, you know, while we are recognized of the complacency in the lower quality segments, and we are running near zero exposure in loans or high yield select opportunities in senior, investment grade corporates, banks, still looks interesting.

And then continuing to work with our specialist team to source one-off transactions. We expect a pretty sizable issuance in the AI space this year. So that will be an opportunity. Again, in the spirit of being opportunistic, we have created ample space in the portfolios to go on the offense when that opportunity comes. So those are some of the themes that we are focused on at the moment. 

GREG HALL: That's so interesting. 'cause I think, again, I think sometimes, you know, people probably think of us as you know, waiting to see issuance and purchasing somewhat passively, but you have the ability, I think, given, you know, the scale on our platform, you know, to go out and seek the opportunities that you want.

And I think that, you know, the notion that negotiating credit transactions is somehow limited to the quote unquote private credit guys, it's a really silly notion that's taken hold and it's part and parcel of your business, right?

MOHIT MITTAL: Absolutely. And I think, again, you know, we've had a very large team of analysts and, you know, we've had very strong relationships with companies, so it's just part of an ongoing work that our team does on a regular basis with the companies as well as with the syndicate desks.

GREG HALL: Let me ask one last question and then we'll let you back to your very important day job and thanks for spending all this time with us, but the dollar. You know, I think obviously there's been a lot of press about it and I know we've got sort of nuanced views around the organization, but what do you think about the dollar? What's our attitude towards its safety at this point?

MOHIT MITTAL: Yeah. So let me first break down the question. The view on the dollar, our view on the dollar is a little bit from a valuation point of view, and we think in this current environment, likely over the secular horizon, some additional weakening in the dollar. So we are running in core strategies you know, some underweight dollar, some short dollar position.

But that does not in any shape or form means that we are concerned about the safety of the dollar or dollar as a reserve currency. We still believe dollar strongly as a reserve currency status. And then, also I think we do recognize that there's a scenario where if you have an extreme risk of event, usually, you know, investors go to the safety of the dollar.

I think certainly there has been more recent data where investors have been looking at the data since April to say, for example, now where you have not seen, you know, when equities decline, dollar hasn't really appreciated, but that's a very short amount of data.

You have a 25 year plus history where during big risks of episodes you know, dollars tends to benefit from that, you know, safety, that aside, I think generally our view is a sum dollar weakening, hence have a small underweight dollar position. And then we'll continue to reevaluate with the incoming data. I think, you know, US, if US growth was to surprise to the upside, that would be a dollar positive scenario as well.

GREG HALL: Okay. Yeah. So it's funny 'cause you know, obviously the press likes to, likes a story, and I think much has been made of, you know, of the dollar itself and expressing a tactical viewpoint relative to some other currencies is not the same as declaring the end of the reserve currency.

MOHIT MITTAL: Absolutely! Absolutely!

GREG HALL: Alright, well, good. Well Mohit, you're very kind to give us this time. I thank you all for listening. This has been a terrific conversation. I've  really enjoyed it. If you've taken anything away from this or you wanna explore some of these topics more deeply, we would really encourage you to visit us. The website in the United States is www.pimco.com.

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