PIMCO’s Outlook for Bonds

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

Ivascyn: We’re now in an environment today where returns have been challenged and volatility has been elevated.

So for all of us as investors that can be a challenging period to operate in. We do believe that this volatility is going to persist, and likely persist for several quarters, but with volatility comes opportunity for active asset managers.

TITLE – With volatility comes opportunity for active asset managers:, SUB-TITLE – Higher yields may mean: BULLETS – More income from a bond portfolio, More cushion from negative scenarios, Greater prospect for total return performance

So it feels terrible. It’s been mostly one way over the course of the last several months, but higher yields mean more income from a bond portfolio, higher yields mean more cushion from negative scenarios, and higher yields mean a greater prospect for total return performance if we have these unfortunate events like Covid, like an expansion of the war in Europe, like other negative growth shocks which can certainly happen in this highly uncertain world that we live in.

Images on screen: COVID-19 screening, oil refinery, gas prices, stock market ticker

And looking back through history, there have been other periods where there have been fairly violent selloffs in financial markets, in the fixed income markets, which then led to a period of stability.

We think it makes sense to be on the defensive side, but also acknowledge the fact that higher rates, although painful on the way up, have uncovered or introduced a bit more value in a market where value had been limited for a fairly extended period of time.

Images on screen: European cities

And many regions of the world now have positive yields again after dealing with negative interest rates, Europe being the most obvious example.

Even without taking a strong directional view on interest rates, this heightened volatility, this period where we do expect to continue to see certain segments of the market,

Text on screen: Heightened volatility may provide opportunity to generate incremental return

Images on screen: PIMCO trade floor

even on a daily or weekly basis, overshoot fundamental valuations, there’s a lot of opportunity to generate incremental return.

And then from an absolute sense, although we as a firm still remain a bit cautious regarding interest rate exposure, at least locally, we’re getting to periods now – we’re getting to levels now where longer term valuations are beginning to look quite interesting.

Images on screen: European central banks, wheat harvesting, oil refinery

Again, all of this is predicated on central banks ultimately gaining control of inflation. And we do think ultimately they will gain control of inflation. It’s going to take some time. There’s a tremendous amount of uncertainty on the commodities front, especially with war in Europe.

But when you think about yields from a longer term perspective, when we do get back to inflation in a more traditional range, we’re beginning to see some interest in value and we do think investors, despite having a terrible experience more recently, should continue to think about a core holding in higher quality bonds as a source of diversification across an overall asset allocation.

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. Diversification does not ensure against loss. Management risk is the risk that the investment techniques and risk analyses applied by an investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection with managing the strategy.

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.

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