Investment Strategies

Core Bonds: Unlocking Value in a Volatile Market

20/02/2025

Mohit Mittal

In the ever-evolving fixed income markets, active management offers compelling opportunities for investors. CIO Core Strategies Mohit Mittal explains our process for building resilient portfolios and the areas we see opportunity to maximize potential total return today.

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Text on screen: How does PIMCO think about taking active risks in fixed income portfolios?

Text on screen: Mohit Mittal, CIO Core Strategies

Mohit: When we think about broad active risks, we try to focus on three key pillars of those active risks.

Full page graphic: Adding value through active management

Image on screen: The graphic shows Mohit speaking on the right and triangle on the left: the triangle has four buckets with callouts on the right side; the smallest, top bucket is called Opportunistic Expressions; the second, slightly larger bucket is called “Thematic Views”; and the third larger bucket is called “Structural Opportunities”.

First is around structural inefficiencies in fixed income markets.

Our view is that in fixed income markets, because of prevalence of balance sheet constraints, regulatory constraints, liquidity constraints, dependence upon rating agencies as well as presence of non-economic buyers like passive investors, creates a lot of structural inefficiencies that we as active managers can take advantage of.

Next pillar for us is around thematic active views. This is where all of our active research at the top down from macro point of view, policy point of view, as well as fundamental credit research comes into play.

And then finally, the third pillar for us is around opportunistic investing. This is where we just have to be a little bit patient. We have to wait for the market to come to us, and you don't see as many dislocation at any, at any time. But generally you tend to see overshoots during periods introduced by geopolitics or liquidity events.

Text on screen: Where are you seeing the most attractive opportunities for active management?

There are plenty of areas that we see opportunities for active adjustment in the portfolio to take advantage of many of the dislocations.

In the corporate credit space, what we have seen is that liquidity premium has come down.

Text on screen: Opportunities for active management: 1. Emphasize higher quality spread

Images on screen: Residential Real Estate

What we have done in the portfolio is reduce our allocation to credit, replace it with higher quality spread products like agency mortgages, like structured products. And that limits the downside in the portfolio during periods of volatility.

More recently what we have seen is a pretty significant repricing in the US interest rates.

Text on screen: Opportunities for active management: 2. Increase the duration risk

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Following that repricing, we have meaningfully increased the duration risk in the portfolio.

We have gone from about a half a year underweight six months ago to now almost 0.75 years overweight on the duration space.

Text on screen: Opportunities for active management: 3. Capitalize on global relative value

Images on screen: Canada, UK and Australia

Global relative value continues to play an important role. We like sovereign bonds in Canada, in UK, in Australia.

Text on screen: Opportunities for active management: 4. Safeguard against inflation and deficits

Images on screen: Agriculture, housing, shipping

Inflation as well as deficits continue to get reflected through tips in the portfolio. One of our macro themes is uncertainty is certain, and this particular environment, uncertainty levels will be high. I think there will be volatility, there will be dislocations.

Text on screen: Opportunities for active management: 5. Increase dry powder

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What we have done is increase the dry powder in the portfolio to take advantage of those opportunities.

I think the net of it is that the reason for why we think fixed income is so attractive, stems from higher yield, stems from the diversification benefit, and stems from the reason that the relative value versus cash as well as equities looks quite attractive.

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Disclosure

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

Statements concerning financial market trends are based on current market conditions, which will fluctuate.

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.

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.

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