From Cash to Curve: Rethinking Allocations as Rate Cuts Loom

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: Tariffs and policy dynamics have been impacting everything from inflation to growth to asset valuations. How are we thinking about analyzing and integrating these into our baseline and risk scenarios, and how do we translate these into portfolio implications for our clients?

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

DAN IVASCYN: Yeah, so I think the first step is to just acknowledge that there's a lot of uncertainty. Still a lot of uncertainty in terms of the economic situation. A lot of uncertainty around inflation, which still, after several years now remains above central bank targets. And policy is highly unpredictable, both in terms of the content of policy itself as well as the delivery of policy.

So, we're spending a lot more time today balancing more traditional economic and financial market analysis with scenario analysis questions. And different assumptions around the trajectory of policy,

Images on screen: Shipping containers, the US Capitol

tariffs being one of them. Other forms of policy, tax stimulus Fed policy, all our other important areas of focus for us, including policy outside the United States

With that said, I also think it's important at least within the fixed income opportunity set to remember that yields or income drives a significant portion of the overall return.  And after a few years of relatively weak performance,

Text on screen: Global starting yields are attractive today

Images on screen: Stock market ticker

we're now at a level today where starting yields on a global basis in terms of the overall global opportunity set are quite attractive. So yes, there'll be noise.  Things will zig and zag along the way, which can create a lot of opportunity to add alpha relative to passive alternatives.

But at the end of the day, over a multi-year time horizon, you should earn an attractive return and across the high quality end of the opportunity set,

Text on screen: High quality fixed income can potentially generate 5%-7% annual returns over a multi-year horizon

Images on screen: Stock market ticker

you can generate potential yields today in the 5, 6, six and a half, even 7% range. And even looking at a trailing 12 month basis, those are the type of returns that have been realized.

KIM STAFFORD: So yields are very attractive. Fixed income has had positive performance and momentum this year. Looking forward, markets are pricing in the fact that the Federal Reserve will probably cut rates in September. How do we think markets could respond? And importantly, how should investors prepare and be positioning their portfolios?

DAN IVASCYN: Yeah, so we do think the Fed cuts rates in September. We do have a little bit more economic data before that decision.

Our base case thinking is the Fed is increasingly focused on weakness on the employment side, is willing to look through what we expect to be slight to moderate increases in inflation over the short term as tariffs do begin to roll through into consumer prices.

Images on screen: Groceries being scanned, grocery aisle

But, you know, we do think that you could see another cut or two after the September cut, acknowledging some of the weakening that we see in economic growth.

Images on screen: The Federal Reserve

And of course, what's going on in terms of the Fed, the administration's approach to the Fed, the upcoming appointments at the Fed, the new chair of the Fed, very well could change the decision making framework in a material sense versus what most market participants are familiar with.

So lots of uncertainty, base case is that there're going to be a few rate cuts from here, bringing that cash rate lower, further steepening yield curves and particularly yield curves in the front end of the market. It's been several years now where you don't pay much of a cost or you don't give up too much yield to own cash.

We're getting to a point now where you're going to finally have the potential for steeper yield curves in the extreme front end.

Text on screen: Bonds can offer higher yields than cash

Images on screen: PIMCO trade floor

And that has implications on fixed income performance, what type of yield you can generate, depending on whether you're sitting in a money market or a cash type investment versus extending out the curve and locking in some of those higher for longer rate type outcomes.

KIM STAFFORD: So with that backdrop, what is your advice to investors on how they can best prepare for this upcoming environment?

DAN IVASCYN: Well, a few things

Text on screen: TITLE – Fixed income opportunity: BULLETS – Focus on a longer-term investment horizon, Cooler inflation can boost the case for fixed income in a portfolio, Bonds look attractive on an absolute basis and relative to equities, Global diversification may reduce risk, enhance returns

One is have a sufficiently long-term horizon.

There’s a lot of localized volatility, but sticking with an income-oriented investment, even an investment with a little bit more interest rate risk will likely pay dividends over the next few years. Again, looking back at the trailing 12 month returns, that has certainly been the case.

I think the second point just relates to correlations. As inflation has gotten down to a more reasonable range relative to central bank targets, there's a likelihood that a strong or a significant fixed income allocation will benefit an overall portfolio.

And then, we talked about attractive valuations in an absolute sense. I think it's important to note as well that fixed income looks attractive not only in an absolute sense, but also relative to equities at these levels.

Then the last point relates to thinking about a global opportunity set. It's still appropriate to focus on some of the higher quality areas of the market, given how tight credit spreads are.

And by expanding your opportunity set across the globe you can minimize the amount of economic sensitivity across the portfolio, generate comparable or even more attractive returns to some of those credit heavy alternatives that people have to rely on for many, many years when high quality interest rates were low or even outright negative in some parts of the world.

KIM STAFFORD: As more investors consider private credit, what perspectives can we offer about balancing both the potential return opportunities with the related risks? How do we think about allocating between public and private credit? And how do liquidity, transparency and credit risk influence this mix?

DAN IVASCYN: These are highly related markets. I think rather than just talking about public and private, I think it's important to look at investments on two different continuums. One liquidity and one economic sensitivity.

There are areas of the market, the private market, where there's very little to no transaction liquidity, no ability to exit that position.

And although there have been discussions about liquidity convergence in markets, a good portion of the private space requires the borrower to give you permission to sell an instrument.

Those investments should warrant a more significant pickup in spread relative to their liquid alternatives.

And then, in other areas of the private opportunity set, there is pretty significant transactional liquidity. There's no practical reason why you cannot source risk, create risk, work with issuers, looking to access these markets in a manner that doesn't preserve material liquidity. And in those areas, again, the requirement for liquidity compensation can be less. So I think investors have to take a look and make apples to apples comparisons.

And I think there's some interesting value that can be uncovered by being very, very careful to make those precise comparisons. And the bottom line is equity valuations are stretched.

There's a lot of money moving into the private assets. A lot of the players in that space seem to, at times, be competing based on market share as opposed to the underlying value proposition. So not surprisingly, the average pickup for going down the liquidity spectrum, fairly narrow, but very, very different depending on what areas of the market or what particular investments you're targeting.

And the whole point of what we're trying to do on behalf of investors is look to ensure that we get an appropriate level of compensation for the relative illiquidity. And a lot of that takes very, very careful underwriting of increasingly complex transactions. On the economic sensitivity piece, and again

Text on screen: Cautious on economically sensitive market areas

Images on screen: Corporate building exteriors

we're most cautious about the more economically sensitive areas of the market, no different than our public portfolios where we have been reducing credit exposure to more economically sensitive areas. Things like senior secured bank loans, things like the high yield market, although the high yield market's a much higher quality market than it's been in the past. Same view within the private opportunity set.

Text on screen: Favor high-quality areas across public and private strategies, such as asset-based lending

Images on screen: Airline taking off, auto dealership

At the other end of the extreme, the higher quality areas of the market, asset backed, asset-based lending, areas where we're quite overweight in both our public strategies, our hybrid strategies, and our private strategies, we think continue to make a lot of sense.

KIM STAFFORD: Great! Well thanks very much Dan, and thanks 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

Disclosure

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value.  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.  Equities may decline in value due to both real and perceived general market, economic and industry conditions. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations.  Private credit involves an investment in non-publicly traded securities which may be subject to illiquidity risk.  Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss.

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.

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.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission| PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. Since PIMCO Europe Ltd services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany) is authorized and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Via Turati nn. 25/27 (angolo via Cavalieri n. 4) 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain), PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) and PIMCO Europe GmbH (DIFC Branch) (Company No. 9613, Unit GD-GB-00-15-BC-05-0, Level 15, Gate Building, Dubai International Financial Centre, United Arab Emirates) are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively, (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF and (6) DIFC Branch:  Regulated by the Dubai Financial Services Authority ("DFSA") (Level 13, West Wing, The Gate, DIFC) in accordance with Art. 48 of the Regulatory Law 2004. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. According to Art. 56 of Regulation (EU) 565/2017, an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO Europe GMBH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). According to the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO (Schweiz) GmbH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015 . The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC AVENIDA CORRIENTES, 299, Buenos Aires, Argentina. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2025, PIMCO.

CMR2025-0828-4784132