Opportunity Amid the Noise

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. Dan, thanks for joining us today.

DAN IVASCYN: Thanks, Kim.

KIM STAFFORD: We named our 2025 cyclical outlook. Uncertainty is certain to highlight the range of potential policy changes and economic outcomes under the new US administration. We've seen some of this uncertainty play out with tariffs at the forefront. How should we think about the global implications of this global trade uncertainty that we're seeing?

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

DAN IVASCYN: Sure. So I think, think you're right. We are at an uncertain time. Uncertainty can be both a risk or an opportunity as well.

The fact that a key aspect of the president's agenda is tariff policy. You do not only have uncertainty here in the United States, but you have a lot of uncertainty in terms of relationships with other countries, impact on markets. And that's creating not only a lot of localized volatility but volatility across countries, across sectors, across yield curves and that's a great opportunity as well. So I think the key theme going into this year is to have a healthy degree of humility around the uncertainty.

Text on screen: Embrace uncertainty and volatility to take advantage of global opportunities

Images on screen: Shipping ports

Acknowledge the uncertainty, but look to take advantage of the full global opportunity set, both within the liquid higher quality areas of the market, as well as in some of the more credit sensitive areas as well.

KIM STAFFORD: Great. Well, we've seen some sharp bouts of market volatility over the past month in the wake of policy shifts, but also threats to the AI investment boom. How should investors think about this volatility and, and how should they evaluate both opportunities and risks in this environment?

DAN IVASCYN: Yeah, I think the AI piece is important as well. Yes, we have a lot of political uncertainty, policy uncertainty, geopolitical uncertainty, but you also have this highly innovative technology that's disrupting traditional models likely to continue to disrupt models.

And anytime you have a disruptive technology combined with a lot of macro uncertainty, there are going to be periods of disappointment.

And again I think we need to prepare for the fact the market's going to be volatile, and again, an active asset manager could benefit from that volatility without volatility, it's hard to generate return versus passive alternatives. And it's been pretty target rich of late. I think that's been borne out in terms of the performance across strategies in the future looks bright as well.

KIM STAFFORD: Dan, can you talk about the implications of inflation and the outlook for Fed policy?

DAN IVASCYN: Yeah, so our inflation outlook for the remainder of the year is that we still are well above central bank targets or at least in the closer to 3% than 2%.

Images on screen: The Federal Reserve

And that creates a lot of uncertainty from the Fed as well. Our base case view on the Fed is the Fed's going to be on hold for the foreseeable future.

The good news from an investment perspective is a lot of the optimism around the Fed multiple cuts for 2025 have now been priced out of the yield curve.

We're back to a point where there's only a slight expectation of modest cuts later on in the year.

Text on screen: Risks are more symmetric, enhancing potential in intermediate part of yield curves

Images on screen: Stock market ticker

So we're at a point now where risks are much more symmetric and therefore we like the intermediate part of yield curves a lot more than we did just a few months ago.

We do think, you know, equities and, and the credit sectors may be a little bit complacent. And that's why we're being a bit more defensive in that area.

KIM STAFFORD: So, talk about fixed income amidst this volatility in terms of range of outcomes, how should investors think about the asset class?

DAN IVASCYN: Sure. Starting in high quality fixed income, a lot of noise, a lot of uncertainty even uncertainty about the Fed inflation still being above target.

But I think it's important for a fixed income investor.

And I try to remind myself of this every day that with high yields in yields that look attractive from a historical perspective, both nominal yields and inflation adjusted yields returns are fairly predictable and stable over a three and certainly a five year time horizon.

Second point that's critically important is that, yes there's increased chatter around risks to higher inflation because of tariffs risk to higher yields because of expansive fiscal policy or even increasing deficits. But I think it's important to note that fixed income's cheap, attractive from a historical perspective. Equities and credit spreads are not they're quite tight.

You don't have to take a tremendous amount of interest rate risk. You don't have to extend out the curve to very, very long maturities.

You can focus on an intermediate term duration portfolio with a little more interest rate risk than you would've had a few years ago when, when there, when there was this valuation cushion. And then it's a very attractive tactical trading environment to add some incremental alpha through smart asset allocation decisions, being tactical, being creative and putting together a portfolio and shifting that portfolio over time as well.

KIM STAFFORD: The US economy remains strong even though interest rates remain elevated. So with this backdrop, how do you assess the health of credit markets both public and private?

DAN IVASCYN: Yeah, well, they're tight. Public markets are tight. Private markets are tight. When you adjust for the quality of covenants particularly in some segments of the private markets they're probably a bit tighter than they would appear.

So what we've been trying to do, and we've talked about this before, is to put together a credit portfolio. Whether it's on the public or the private side of our business that's sufficiently robust and resilient, if we are wrong in terms of our growth outlook. And there are negative shocks or other factors that can impact credit.

So this has been a time over the last few months where spreads are tight, markets are extremely liquid, and you can shift out of the most economically sensitive areas of the market. You can avoid some of the floating great lower quality credit markets in favor of markets that have better fundamentals.

Text on screen: Strong consumer balance sheets boost lending opportunities

Images on screen: Residential neighborhood and real estate

And then as we've talked about repeatedly over the last few years the consumer balance sheet remain strong.

Home prices have gone up a lot. So if you can source season mortgage collateral if you could lend to the consumer, again, similar asset allocation themes to the public and private areas of the market, you can match the yield in certain sectors that have more risks that we think are currently being underappreciated and have downside protection.

The last point I'll make just relates to other types of proxies for credit or alternatives to credit agency, mortgage-backed securities continue to look attractive. It's so rare to see agency mortgage nominal spreads wider than investment grade corporate spreads.

It almost never happens. But when stocks go up a lot, when there's this rush up to target credit assets, and when interest rate volatility has, is elevated, you do have this situation where you could buy a very high quality asset, a very liquid asset, an asset with a little bit more complexity to earn incremental spread with a significant advantage in more negative economic scenarios.

There's lots of other examples of this on a global basis.

And again it's a pretty target rich environment, not only to deploy capital but all to also to just enjoy the benefits of attractive yields in even equity-like returns and some of the higher risk areas of our credit opportunity set.

KIM STAFFORD: Great. Well, thanks very much, Dan. Thanks. Thanks to all of you for joining us. We'll see you next time.

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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. Equities may decline in value due to both real and perceived general market, economic and industry conditions.

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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