The Time for Bonds
Text on screen: PIMCO
Footer Overlay: PIMCO provides services only to qualified institutions, financial intermediaries and institutional investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.
Text on screen: Ken Chambers Fixed Income Strategist
Kenneth Chambers: At the start of the year, we talked about the Concentric Circle framework and the idea that we'd likely see a bit more volatility on things like the outer rings, essentially higher risk assets. How is our thinking evolved given everything that's transpired over the last couple of months?
Text on screen: Marc P. Seidner, CIO Non-traditional Strategies
Marc Seidner: Yeah, that's a great question, Ken. First of all, in these sorts of uncertain times or even radically uncertain times, having a proven framework is definitely a benefit.
FULL PAGE GRAPHIC: TITLE – Proven Framework: Concentric Circles. The subtitle is: Expect volatility due to central bank policy to decline, but asset market volatility to remain elevated. The chart shows concentric circles, which represent PIMCO’s longstanding investment framework. The framework starts in the middle with federal funds and overnight repo, followed by short-term core government bonds and commercial paper, intermediate core government bonds, long core government bonds, and Agency Mortgage-Backed Securities (MBS). Moving further out the circles are AAA securitized products (which includes Asset Backed Securities [ABS]/Residential MBS/Commercial MBS and Collateralized Loan Obligations [CLOs]), followed by investment grade industrials, senior financials and municipal bonds in the middle rings. The riskier outer bands include bank capital and high quality Emerging Markets, high yield, bank loans and low quality Emerging Markets, as well as equities and direct real estate. PIMCO continues to prioritize inner-ring investments in the current environment.
With regard to the concentric circles, as we look back to 2022, to the middle of the circles, overnight rates, repo central bank, official policy rates, that was the, capital the, source of volatility for markets. We think as the central bank tightening cycle continues to mature. Eventually slows. Pauses or in fact, ends, that volatility is going to subside. And that is going to create opportunity at the center of that universe, the center of the concentric circles. We're still very cautious about the outer rings.
We're entering a really dangerous part of the economic cycle. And those outer ring assets are very economically dependent.
Kenneth Chambers: A question that we get a lot is when you look at front end yields, why not just sit in cash at this point in time? If you think about, maybe a solutions perspective, how should investors be evaluating the fixed income opportunity set and really the benefits of bonds at this time?
Marc Seidner: The simple answer is you're getting pretty attractive all-in yields on
FULL PAGE GRAPHIC: TITLE – The Fixed Income Opportunity: Attractive yields and diversification. The subhead reads: Potential for higher income as well as capital gains in a risk-off environment. The bar chart shows yields across fixed income asset classes, with March 31, 2023 yields shown in solid-colored bars, and December 31, 2021 yields shown in the striped bars. Relative to December 2021, yields across high-quality fixed income sectors rose substantially as of March 2023, including U.S. Core Bonds, Global Aggregate, Agency Mortgage Backed Securities, and AAA-Securitized Bonds. The yields on relatively higher risk sectors also rose significantly as of March 2023, including Municipal bonds, Investment Grade Credit, High Yield Credit, and Emerging Markets. The box on the right shows The case for bonds: The correlation between stocks and bonds has turned negative in recent weeks, solidifying the case for diversification.
two, three, four, five-year duration, intermediate high quality bond portfolios. And so, if you're getting those attractive yields as a starting point in a more uncertain environment, why wouldn't you want to lock them in for some period of time? Cash is a zero-duration asset, which is great when interest rates are rising because you get to reinvest. But the problem is when the cycle turns and interest rates begin to fall, it can go away real quickly. That yield, that level of income can go away very quickly versus, again, that intermediate opportunity set where you can lock in pretty attractive yields at these levels.
The question in 2022 was, well, is there a diversification benefit or are correlations permanently impaired? In other words, bonds go down, risky assets go down, and there's nowhere to hide. I think the events of March have reinforced once again that there is a diversification benefit for owning high quality fixed income. And again, my sense and I think our sense is that those correlations remain intact and that owning an intermediate or long duration bonds will once again provide that diversification benefit. So, the simple answer is avoid reinvestment risk, lock in good levels of income, yield, get yourself set up for the potential for capital appreciation and of course, the benefit of diversification.
The opportunities are coming to us. I think it's a call for action. I think we're getting to the point where there is a call for action that both on the public side now that yields have reset and we have that benefit of diversification again, combined with the growing private side opportunity, there is a call for action to deploy capital. And that would be my advice to investors over the cyclical time horizon.
Text on screen: For more insights and information, visit pimco.com
Text on screen: PIMCO
Disclosure
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. Private credit involves an investment in non-publically 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. Diversification does not ensure against 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. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, Corso Vittorio Emanuele II, 37/Piano 5, 20122 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) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised 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). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch 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 and (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. 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. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). 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 (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 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 Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, 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. | 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 (110) Jin Guan Tou Gu Xin Zi No. 020 . 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. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | 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. ©2023, PIMCO.
CMR2023-0410-2837298