Value Returns to Fixed Income Markets

Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

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.

Dan Ivascyn: Thanks, Kim.

Kim Stafford: Before we get started, it’s the holiday season, happy holidays to you and your family and happy holidays to all of our clients. Thank you so much for your partnership. We really appreciate it.

Dan, interest rates have endured a period of long lasting volatility in 2023, even as we've begun to see signs of stabilizing in recent weeks. What factors have driven this volatility and what sorts of conditions might be needed in order for us to see more long lasting stability in 2024?

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

Dan Ivascyn: So I think the driver of this volatility is still this tug of war between slowing growth, at least in key parts of the world, and inflation remaining above central bank targets. And the resulting uncertainty both from a policy perspective as well as how the fundamental data may look. Drop on top of that, a little bit of geopolitical uncertainty and a highly uncertain election cycle right around the corner, we think is going to lead to continued uncertainty.

Volatility will probably be higher than it has been historically, but we do think and are a bit more constructive about inflation heading back towards central bank targets. Policymakers on hold perhaps for an extended period of time, but with the bulk of the tightening over, that should lead to a better, more constructive investment environment.

Text on screen: Value has returned to fixed income markets

Images on screen: PIMCO trade floor

And last but not least, of course, this great value back in the market, particularly on the fixed income side.

Higher yields, higher inflation adjusted yields provide some inherent cushion. So we do think investors can expect a more resilient return profile from fixed income and we're excited about that.

Kim Stafford: One question that investors are wondering are why not just sit in cash? Why should investors invest in bonds versus cash today?

Dan Ivascyn: Yeah, that's a tough one. Cash has been kind to investors and it's been rough to be in more interest rate sensitive assets. Probably the best example I can come up with has been the performance of the bond market over the last few weeks. Very, very quickly, and really based on just a little bit of economic weakness in the data, we've seen long bonds generate total returns of 10% or so, even intermediate bond type funds over the last month have generated positive returns of 3, 4% or even greater in some instances.

Text on screen:

Images on screen: Retail bank

Just a reminder that with cash you are able to lock in these high yields on an overnight basis, but there's no guarantee on how long you'll be able to achieve those yields. In an environment like this one, with inflation gradually heading back towards central bank targets, 2024 may be about rate cuts and the ability to generate not only very, very attractive yields in longer maturity investments, but also the prospect for price appreciation.

One of the favorite areas of the yield curve that we like is somewhere in that 3 to 5 year range. You're not locking in bond yields for 10, 20, 30 years. You're just extending out the curve,

Text on screen:

Images on screen: PIMCO trade floor

being able to achieve and the high quality bonds yields of 6, 7, 8% or even greater in some instances. And we think that's a nice balance between the safety and at least predictability overnight of a cash yield with being able to lock in yields for an extended period of time.

Kim Stafford: Great. So let's get to opportunities, how we’re approaching opportunities across public and private markets. How would we deploy the next investable dollar in public fixed income and in private markets?

Dan Ivascyn: So what you're seeing is that the public markets have repriced and repriced quite significantly.

You can focus on areas of the market with very, very strong fundamentals and generate very, very attractive returns, both absolute and relative to less liquid alternatives. The private markets, though, are going through a significant adjustment period, private debt originated or deals done in that late 20, 20, 21, early 22 period under considerable strain and stress.

Images on screen: The Federal Reserve

It's mostly a floating rate market, at least on the debt side, borrowers are susceptible to very, very high central bank policy rates that are likely going to stay higher than some investors anticipate.

So there are going to be challenges in that space and it's going to be a great opportunity for private capital to exploit opportunities with the banks used to satisfy that demand for lending and take advantage of a series of restructuring activity both in commercial real estate, in the private corporate credit markets.

Text on screen: Area of high-conviction: Specialty finance

Images on screen: Auto and aviation

Then an area we like a lot is specialty finance. That's true both on the public and the private side. That's a segment of the market benefiting from a strong consumer. It's benefiting from the post global financial crisis regulation that hasn't impacted non-financial corporate direct lending and why we think there's a little bit of froth in that space.

Text on screen: TITLE – Fixed Income Opportunities Today: BULLETS – Treasury Inflation-Protected Securities (TIPS), Commodities, Agency Mortgage-Backed Securities, Structured products

We still think that it makes sense to source inflation protection in markets if you're doing it in the fixed income market. Good old fashioned U.S. Treasury inflation protected securities look attractive here. Very, very high. Real yields, relatively low break even inflation rates.

We think investors probably own too little commodity exposure across portfolios. We think that's a very, very attractive area of the markets as well. Probably our favorite trade at the moment, agency mortgage backed securities. They're very, very high quality asset trading at very, very wide spreads versus corporate bonds versus treasuries. That's an area of the market that we think makes sense to overweight across a variety of strategies.

We think the risk of a recession next year is somewhere around 50%. But we think the market's more optimistic. So consistent with an upward quality theme, we have significant overweight two very, very high quality structured products, in many cases triple-A rated structured product and in up in quality bias across investment.

So bottom line, get excited about today's public opportunities. Be prepared for steady, incredibly attractive opportunities within the private space.

Volatility could be higher than what we've grown accustomed to. And that's a great environment for active asset management, for active asset allocation decisions. We're here to help our clients in those areas, but we're pretty excited about the prospects for returns into 2024 and haven't been this excited in in several years.

Kim Stafford: All right. Well, thank you very much, Dan, and thanks to all of you for joining us. Happy holidays and we'll see you next time.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

Disclosure

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, via Turati nn. 25/27 (angolo via Cavalieri n. 4), 20121 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 (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, 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 (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) 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. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, 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. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | 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 (112) Jin Guan Tou Gu Xin Zi No. 015 . 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. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC Avenida Leandro N. Alem 882, 13th floor Buenos Aires, Argentina. | 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.

CMR2023-1130-3255323