Bonds Shine in Volatile Times
Text on screen: PIMCO
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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:
We've been talking about for a while value returning to bond markets and we've actually seen that come to fruition in absolute and relative performance. How should investors think about bonds on a go forward basis?
Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer
Dan Ivascyn:
They should be happier than they've been over a good portion of the last few years. Not only have we achieved attractive yields this year, we've finally seen some total return of price performance as well.
Text on screen: Bond returns are promising with attractive yields and strong performance
Images on screen: PIMCO trade floor
And I think an investor looking at a 3 to 5 year time horizon or looking at current yields within the higher quality areas, the bond market still should be quite excited about the return potential in an absolute sense as well as potential returns versus riskier areas in the financial markets like equities.
So we have had a significant rally and we've also had a big shift in positioning across the yield curve. So this has been very, very attractive from an active management perspective.
There's a lot going on all around the world. But there's also been tremendous divergence around high quality bond markets. Some central banks have already cut rates. Other central banks are dealing with inflation challenges like Japan.
Images on screen: Bank of Japan, Tokyo exterior
It's creating divergence. It's creating fundamental overshooting in markets, technical unwinds.
The name of the game in many respects is to take advantage of this overshooting, have a longer-term horizon and be able to use all the tools at our disposal, generate value for the investor.
Kim Stafford:
In addition, obviously, we've got the U.S. Fed poised to cut rates. The pace and the magnitude of those of those rate cuts is a little bit uncertain given some of the slowing economic data and labor market data. How should investors think about this? How are you thinking about that in terms of active management?
Dan Ivascyn:
Yeah, well we see signs of the economy slowing. The inflation data has been more constructive over the last few months, certainly relative to where we were earlier in the year. And we do think with the high probability the
Images on screen: The Federal Reserve, Jerome Powell
Fed is going to begin to cut rates in September, we also think there's a decent chance that the further rate cuts going into year end.
They're going to be very data dependent. Some of the
Images on screen: Construction site, clothing retailer, credit card point of sale terminal, residential neighborhood
data has been weak recently, some of the data is a reminder that we're not in a recession yet and the economy still has a decent amount of momentum.
So this has been a great environment to make active investment decisions.
Having a global perspective has been quite rewarding and we expect that to continue to be the case. So it's fun again, fun for bonds to be generating positive returns, but also fun in my seat , and I think I can speak for the whole team, in terms of confidence in the ability to generate attractive risk adjusted returns for many quarters to come.
Kim Stafford:
So in terms of investment implications, obviously potential rate cuts, increased volatility, can you specifically talk about the role of duration in portfolios for investors?
Dan Ivascyn:
Yes. So I think this was an example, again, over the last several weeks where duration served its role as being a diversifier across a multi-asset portfolio. Put more simply,
Images on screen: Stock market ticker
when stocks went down a lot, bond prices went up.
Today our fixed income valuations are much more attractive, both in relative terms, and absolute terms. So we think not only will bonds provide attractive returns in the base case, they should begin to exhibit those diversified qualities that have really strengthened the case for them to be in an investor's portfolio.
Text on screen: Bonds can provide better diversification benefits compared to cash
Images on screen: Retail banks
As a reminder, cash does not provide that type of diversification. What you can do by taking on a limited duration exposure is lock in these very, very high rates of return for many, many years to come.
We're not talking about taking massive duration risk across portfolios. We still think it makes sense to have maturities in the intermediate portion of the yield curve.
We think that after the rally that we've seen more recently, that tactically you can put new duration into a more defensive position.
Kim Stafford:
And to that point, investors should act now or wait until the rate cuts come to fruition.
Dan Ivascyn:
I think there are some people out there saying that total return in fixed income was dead. The last few months were a reminder that that's very far from being the case. These rallies can happen in an unpredictable fashion. And if you wait, you're at risk of the cash rate dropping and you not be able to lock in those returns.
Kim Stafford:
And you obviously mentioned divergence. That was a theme that came up with a conclusion of IRAs that we predicted in our and our cyclical outlook back in in April. We're seeing it come to fruition. It's creating volatility and opportunities. What global investment opportunities are emerging today that you want to talk about?
Dan Ivascyn:
Yeah, the first will be just high-quality opportunities. When you look at the world today, there are a lot of countries that have more fragile economies, economies where the household sector is much more sensitive to these higher policy rates. They also have yields that in some cases are actually higher than the United States, and they have governments that are close to balancing their budget, which is always nice from a fixed income perspective.
So countries
Images on screen: Australia, New Zealand, the United Kingdom, Canada
like Australia, New Zealand, the United Kingdom, Canada, higher quality emerging markets have underperformed more recently are all very attractive diversifier versus the United States. And all of those generally are high quality bond markets. We haven't necessarily gotten quite enough widening in the more economically sensitive credit sectors yet, but even there would be getting to see, you know, more overall volatility.
So our general themes now are to remain nimble, remain liquid, be up in quality.
Stay diversified, use the whole global opportunity set, and then sit back and wait for the type of volatility that we've seen more recently to be much more tactical and targeted in your allocation to some of the riskier segments of the market.
Kim Stafford:
Great. Thank you very much. Dan, thank you for all for joining us. We'll see you next time.
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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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Equities may decline in value due to both real and perceived general market, economic and industry conditions.
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