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Daniel J. Ivascyn
Investors are finding it challenging to identify sufficient income-generating opportunities in an extraordinarily complex investment landscape, hampered by an environment of low yields and anemic growth. In the following interview, senior Portfolio Manager Dan Ivascyn discusses markets and how the PIMCO Income Strategy pursues attractive sources of income while also seeking the protection of capital and long-term growth potential.Q: Amid concerns that global growth may remain subdued for years to come, do you anticipate low bond yields to become the norm for the foreseeable future?Ivascyn: Bond yields have been declining on a secular basis and have now reached levels unimaginable to an earlier generation of investors. The decline has been driven by economic fundamentals, including more disciplined central banking and innovations in financial intermediation. More recently, the global financial crisis and its recessionary aftermath drove desired savings higher and triggered an aggressive monetary policy response by central banks, both of which have put further downward pressure on bond yields. Although we expect this combination of fundamentals and technicals to keep rates low for an extended period, we are also cognizant of the potential of brewing inflationary pressures over the longer term horizon.Q: What does such a low bond yield environment mean for investors who seek income for retirement and other goals?Ivascyn: In the current low yield world, investing solely in lowest-risk government bonds may not provide adequate sources of income to meet investors’ goals. At the same time, searching for yield by taking on increasing amounts of risk could expose investors to principal loss, the base upon which income is generated. As such, capital preservation must be a priority.
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 certain risks including market, interest-rate, issuer, credit, and inflation risk. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally backed by a government, government-agency or private guarantor there is no assurance that the guarantor will meet its obligations. Sovereign securities are generally backed by the issuing government, obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy. There is no assurance that the liquidation of any collateral from a secured bank loan would satisfy the borrower’s obligation, or that such collateral could be liquidated. 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. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. Diversification does not ensure against loss.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2013, PIMCO.
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