Investing in the Year Ahead: A Conversation with Dan Ivascyn

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RECORDED EPISODE:

GREG HALL: Hi everyone! Welcome to Accrued Interest, PIMCO's podcast dedicated to delivering thought provoking, impactful, and timely investment ideas to financial advisors and their clients, accrued interest is part of our advisor forum platform, which you can find @www.pimco.com. My name's Greg Hall. I lead our US wealth management business. I'm delighted to be your host today, but I'm even more delighted to welcome Dan Ivascyn to join us for today's pod.

Dan is our group, CIO. You might interpret from that title that Dan oversees the entirety of the investment function here at PIMCO. In addition to which he plays a personal leading role on a number of the products that you may know from PIMCO. Many of you will associate him with the income fund, which he has stewarded since its inception.

He plays a lead role on our total return fund and has been deeply, deeply involved in the development of our alternatives businesses, spanning hedge funds and private markets over the last 20 years or so. He's a busy guy, he's got a lot going on. We're, we're grateful to have him here. There's nobody at PIMCO with greater depth or breadth of experience to help kick off the new year. Welcome, Dan!

DAN IVASCYN: Thanks, Greg! Great to be here!

GREG HALL: Appreciate you being here. Let me, I wanted to start before we get into the meat of the conversation today, just to address something, I think a sentiment that we both share as does everybody here at PIMCO, I think starting a the podcast off for the year, ordinarily, we'd be I think very joyously wishing everyone a, A Happy New Year, and we certainly do hope all of our listeners have a happy, healthy and prosperous 2025.

But this year, of course, it's tempered a little bit by, just I think some shock and sadness at the devastation of the wildfires, up in Los Angeles. Our hearts go out to everybody impacted. We have friends, colleagues, family members who've been impacted. We'll be working as a firm through the PIMCO Foundation. I think many of us individually as well, to help Los Angeles recover and rebuild.

DAN IVASCYN: Yeah. You know, you're right there. We are, you know, down here in Orange County not too far away. And we've been fortunate to avoid a lot of the, you know, destruction in challenges, you know, that our neighbors are facing up north. Yeah. So we fully agree with you. It's been a tough start to the year, and we hope things stabilize as soon as possible.

GREG HALL: Yeah. A city that's near to us geographically. And of course dear to us personally. Well, Dan, I was given a very long bio listing, your many accomplishments you know, here at PIMCO  and before arriving, it felt like it might be a little awkward to sit in front of you and read it to you. And I know how fond you are of being praised or lauded in public. You're a pretty humble guy, so I didn't want to do that. I actually thought it'd be a lot more effective if you maybe wanted to introduce yourself a little bit to listeners and give us a sense of how you came to PIMCO, what your journey's been like at the firm.

DAN IVASCYN: I'll be brief. I could go way back, but I guess, I'm a kid from Massachusetts that came out to the West Coast pretty early in life. Got my undergraduate degree up in Los Angeles. And then spent some time in the business, but more in a sales and servicing role, always with a passion for fixed income. So I always had an eye towards, you know, coming back in some capacity and actually, you know, making portfolio decisions on behalf of clients. And thought I was headed back to Bear Stearns, had spent a summer working on in and co-authoring a handbook.

GREG HALL: This was nineties.

DAN IVASCYN: This was in ‘97 Yeah.. So going, going way back and working on what was, you know, you know, really the beginning of the home equity or the subprime market. Working on a research piece then. And it's quite interesting 'cause I thought I was going back to Bear Stearns kind interviewed very, very late in the recruiting process here at PIMCO, and thought it was a great place to work. We had been...

GREG HALL: Bear was, was Bear active in like the ABS market, the asset backed market back then with all these high LTV guys? Is that where you'd focused on when you were there? 

DAN IVASCYN: They were, they were, you know, I ended up working in the research group which was closely connected to the investment banking area. Bear Stearns was a leader in bringing deals to market. It was known as home equity, the home equity market, it was really subprime or the early days of the subprime market.

Although I didn't go back to Bear. I came to PIMCO. We had a very strong trading relationship. So I guess my beginnings were in the asset backed space. Quite popular nowadays. Of course, <laugh>, you know, asset backed investing is cool again, of course, it wasn't so cool during the LTCM crisis in 98. And then, of course, the challenges during the the global financial crisis.

GREG HALL: But what a time to start, right? I mean the, to launch your career into the teeth of, yeah, long-term capital, Russia crisis, and the demise of virtually every wholesale financed lender in the home equity space.

DAN IVASCYN: And that's right. And I did a little bit of agency mortgage trading along the way. I remember Bill Powers, who I reported to directly, said to me, 'Hey, you know, welcome to PIMCO. You know, we're gonna have a nice trading program. Take your time. You know, don't worry about executing trades anytime, you know, soon'. We want you to build a foundation. And then when the LTCM or long-term capital volatility hit the marketplace, and we were trading far more than we thought, he was throwing paper tickets, you know, down, down at me, and...

GREG HALL: This is your first summer at PIMCO?

DAN IVASCYN: This is my first couple of weeks at PIMCO.

GREG HALL: Yeah. Literally

DAN IVASCYN: For the first couple weeks. And, you know, back in the day when you didn't have the luxury of computer execution, you had to hit your phone eight times, call eight dealers, <laugh> lights would flash. Then you'd get your levels back, and you're supposed to sell to the highest bid and buy at the cheapest offer level. Sounds good in theory. Easier said than done. When you have the flashy lights, you have to do it quickly, and the market's moving around. So it was trial by fire, but that's really been PIMCO. It's always been a fairly lean organization, a flat organization.

You tend to get involved quickly, trial by fire, but also, you know, learning by doing and operated in this asset act in mortgage space early on in my career. And then, you know, as a lot of us do, you know, just steadily take on more responsibilities, broaden out your areas of focus, but still an asset-backed trader at heart, but of course, have, you know, migrated into other areas of the market looking for value for our clients.

GREG HALL:  You had your 25th anniversary at the firm it feels like last month, but it was a couple, 18 months ago. A couple years ago. So 25 plus years into it, I would imagine you still feel like, you know, new skills, new areas of study, new people to learn from.

DAN IVASCYN: Yeah, absolutely. I think you feel the same way. You know, what's so great about this industry is that just when you may think you're about to figure it out, the macro environment changes something new, you know, hits the marketplace that you have to react to. So, you know, even today, we have a new administration, new priorities, regulatory regimes change, valuations change. So that's what's so great, is that you never have it fully figured out.

If you think you have, you better stop and pause and realize you probably don't, but it makes it really exciting. And it's especially exciting in an environment, you know, like today where there's so many other forces at work that the younger generation understands far better than folks like myself. So it's always exciting because you have to listen a lot, get to know different perspectives, and then just get out there and explore. It's fun in that regard.

GREG HALL: One of the things though, just as we're sort of rounding out people's awareness or familiarity with you, that I think maybe is not as obvious to a lot of our listeners.

Maybe some of 'em have had the fortune of joining us here in Newport for a conference, or you've been out and about, you travel a lot, you see, you know, a lot of our clients. But you speak to a lot of financial advisors. And, I know, that obviously, I appreciate that in the business that I lead, you make a real point of getting out there and talking to people one-on-one.

You're famous for shooting an email over to me and to Phil Neugebauer, our head of strategy, looking for half a dozen names of people you can call on a Friday afternoon just to check in, say thank you. See what's on their minds. What drives that impulse for you? What do you glean from those conversations?

DAN IVASCYN: You know, I'm not sure, and again, I started as a financial advisor. So maybe there's some connectivity there.

But it's really great just to compare notes to hear what people are seeing and thinking about markets, meeting people with different perspectives, different areas of focus than where I'm typically operating. And it's just good to connect on the human side. I wish I had more time to do it, as, you know, I sometimes get backed up, but it's always a great way to connect to the end client and hear directly from the mouths of, of people that are, you know, serving a very important role, on what we could be doing better.

Other thoughts, perspectives, contrarian viewpoints credible ideas from others, you know, in the industry that may be different than our own.

GREG HALL: So the experience that those conversations, often they bring with them is in, I think it's invaluable, right? These are people who've seen cycles and their pattern recognition and sense of, like, we've seen this movie before is incredibly valuable.

DAN IVASCYN: Yeah! Absolutely! Absolutely! I agree.

GREG HALL: I know you value that too, even here at PIMCO. Alright, well, let us move on to what I think most of the advisors listening are probably most interested in this conversation, which is, what is Dan Ivascyn's outlook for 2025? We just published our, cyclical outlook uncertainty is certain which I think is a brutally honest title, about where we think markets stand in 2025. I'll give you the mic, you know, where wherever you see fit. Let's get into the outlook.

DAN IVASCYN: Lemme hit a few points. And it may sound a little bit like a cop out, but the good news is you don't need a precise outlook at least within the fixed income markets. And what I mean by that is that there's a tremendous valuation cushion that's built up into the higher quality areas of the bond market. That's been painful because as that valuation cushion is built, it's meant negative returns in a really, really volatile 2022. But starting yields are attractive.

They're attractive in a nominal sense. They're attractive relative to a still elevated inflation rate. They're attractive relative to their history, they're attractive versus equities and cash. So I think it's important to note, as an allocator of capital, that with good initial conditions, the prospects for returns over a multi-year basis are quite attractive.

And I say multi-year, because I think most advisors listening to this podcast have clients that do have a multi-year time horizon. So yeah, there's gonna be a lot of noise. And that was our whole point with the cyclical outlook. Got a lot of uncertainty. Trump administration priorities. What does the Fed do? What do other central banks do? Geopolitical risks.

They're elevated. But the great news again, is that if you're patient in the high quality fixed income markets, unlike other sectors, you earn your yield. There's about a 95% correlation between the starting yield and the return you're gonna get over a five year basis. And today, in some of the higher quality strategies that we focus on, you may get a starting yield in the 6, 7% range.

So I think that's point number one. In terms of the specific outlook, we're fairly optimistic. We think that there's a good chance that earnings hold up yeah, there's more uncertainty outside the United States. You have less technological innovation, less vibrant consumer sector across many of the economies within Europe, the UK.

Obviously, China's going through a period of disinflationary pressure in a lot of growth uncertainty. This is great for active asset management. Less synchronized cycles. A lot of localized volatility. A lot of room to express relative value views and not just you know, put all your chips down, so to speak, on one singular directional field.

GREG HALL: So much lost in the index, relative to the opportunities you're describing.

DAN IVASCYN: Absolutely right! And you're gonna say, okay, well, we, you know, we're PIMCO, we're a global active asset manager. What would you expect me to say? But, you know, I think two points there, one, a few years ago, you know, late 21 as an example of strategies, like our income strategy had our all time lowest interest rate exposure. We tended to be very concentrated in the United States because although rates were low here, they were negative in many other parts of the world.

So today, when you look at our positioning, when you look at our activity we are taking advantage of a global opportunity set. We're able to add value outside of these passive indices that aren't particularly interesting or exciting, the way that they're constructed today. So we're generally optimistic, but, you know, back to the outlook.

GREG HALL: Yeah, sure, sure.

DAN IVASCYN: We do think in the base case, growth is gonna remain strong in the US. We think that the Fed is gonna look to cut rates once or twice this year, but for the time being, they're gonna be on hold, inflation's elevated. There's still plenty of uncertainty regarding Trump policies. So I think the base case thinking is that we're gonna continue to have elevated short rates, but short rates now that are comfortably below the rates you could achieve in a intermediate bond portfolio.

GREG HALL: Can I ask, just, let's pause one second. That last point that you made, I wanna make sure, I, you'll probably remember a few months ago when Rich Clarida, our global economic advisor and former Fed vice chair who works with us here at PIMCO now, he sent an email around, and I think it was titled, 'Stop the Presses' because the front rate had dipped below the Agg yield for the first time in a couple of years. You'll know better than me, and I'm not sure that people have a strong enough sense of just how weird of an environment we had or how long that weird environment had persisted. And maybe you could just give some life to that.

DAN IVASCYN: Oh, yeah. It was an exciting day for us from a business perspective. As you can relate, you know, in your role...

GREG HALL: Finally had an argument relative to cash, that is true.

DAN IVASCYN: And it's important though I joked around that my mood moved inversely with the 10 year treasury rate during 2022. Those that, yeah, as you know, those that had interact with me knew that was the case. But I think it's been a very unique multi-year environment where the cash rate's been above the interest rate you could achieve in a longer maturity bond portfolio.

This goes back to this cushion point that we talked about earlier. When you have that type of situation, you have to pay to take duration risk. And we remained in that environment for an extended period of time, with the cuts that have occurred thus far with our central bank, the Federal Reserve, and then other central banks as well, bringing policy rates down. Now you have a much steeper yield curve.

You can actually pick up significant incremental return or expected return or yield by extending out the maturity spectrum. So that's point number one. And I know it's easier said than done. It's been a bumpy journey. But you have a situation today where the cash rates lower than longer maturity bonds, and where inflation's back down to a point where it's close enough to central bank targets, that there are plenty of scenarios where there are negative growth shocks, other surprises that negatively impact other areas of a household's portfolio that could lead to cash rates coming down even faster than it's currently anticipated.  Or put more simplistically, you now pick up a yield advantage and you benefit from the insurance that a high quality fixed income portfolio provides.

GREG HALL: Yeah. I think a lot of advisors are literally right now, are going through the analysis. They have held cash, very intelligently over the last few years as the insurance policy, the ballast in the portfolio. It's paying a nice high yield. If you extend it out and picked up duration, you had to pay for it, like you just said. But now you get paid to extend duration.

And just to make this overly simplistic in the event of an economic downturn or some kind of economic event, we would think that bonds play their kind of traditional role in the portfolio of insulating of having positive total return when you see that economic event. So in effect, you're being paid to take out an insurance policy by venturing out of cash and into fixed income. Is that, am I being too simplistic there or...?

DAN IVASCYN: No, I think you hit it right. I, the other point I, you know, to emphasize is that back a few years ago when your starting yield was 1 or 2%, it took a very small interest rate move to put you into negative return territory. Today, if you're starting with a 6 or 7% return in your portfolio, and you have a few years duration, you could have a meaningful sell off in the market and still end up with a positive return.

So there's this cushion again, and I know a lot of us are conditioned, and, you know, I'm a big fan of the behavioral finance literature. I think it's a key way to make more objective decisions than others in the market, avoid the tendencies to do irrational things and in the process make money for investors.

But there's this concept of recency bias. And, you know, 2022 was a rough period. We've had volatility over the last couple of years, including a pretty significant sell off the last few months. So, you know, we'd like to see more bearish sentiment in the market. And today, I think I can safely categorize this as a market where people are still pretty bulled up on equities.

They've had an incredibly positive experience in more economically sensitive or lower quality credit risk private markets, not surprisingly in this environment where, you know, duration has performed so poorly, particularly floating rate, credit risk are areas that continue to get a lot of inflows. And there's probably a little bit of complacency in those markets.

So from a sentiment perspective, I think you're in the right place in terms of a fixed income allocation. And it's really, really great to see a setup where you got really, you know, attractive valuations, and you still have this negative sentiment in the markets. That's usually a recipe for pretty good returns, and sometimes surprisingly good returns on a, go forward basis.

GREG HALL: One of the things I wrote down as I was preparing for this over the last couple of days is, you know, it seems to me like with the quote unquote the Trump trade and the sort of animal spirits that's introduced into markets, it feels like all the optimism is reflected in the equity markets and all the pessimism is reflected in the fixed income markets. And at some point, those two would seem to need to resolve themselves

DAN IVASCYN: At some point. Absolutely right! And, you know, just a couple of days ago, it was the widest gap that we had seen in several decades between the multiple, you know, here in the United States equity market versus the real or the inflation adjusted yield in the fixed income market. Now, again, it does not mean that these have to mean, revert or adjust very, very quickly.

But back to the original point within fixed income, you get paid while you wait. You're earning this yield, and then at some point in time in the future, you may get some price appreciation as well. It could go the other way, of course, over the short term. But, you know, we do think that the setup is increasingly attractive to be able to generate some additional incremental return from some price performance as well.

GREG HALL: And would you agree? I mean, I would, if I were speaking to a financial advisor now, or from one of their clients, you know, I'd emphasize that a constructive view on equities can peacefully coexist with a constructive view on fixed income. And, in fact, if you're bullish equities and you think that's, you know, where you want the majority of your portfolio placed, might be a really opportune time to add to your fixed income portfolio and take out, ensure some of that tail risk as you, you know, pursue those equity returns that you're predicting.

DAN IVASCYN: Yeah. I would agree with that. And I would also add that as inflation becomes less of a concern, or to the degree it becomes less of a concern, maybe I'll qualify it a bit. Having more fixed income in one's portfolio can allow you to own more equity risk. You know, we talk about these risk parity strategies, and it's a more of a technical point, but, you know, when you think about the optimal asset allocation, you can get to a point where, those bonds, you know, provide some volatility mitigation and are a better, more robust setup than having excess cash as well.

But these are things that we can run on behalf of clients. They involve certain assumptions. But I think the point is, in 2022 when inflation was near double digit levels, those were quite strained arguments, especially with the starting yield of one or 2% in the bond market. When you look at where you are today, and you look, especially at times where you've had a similar setup in the market in terms of relative valuations, cash, equities, and bonds, we think it bodes well for returns by adding a little bit of fixed income to an existing allocation.

GREG HALL: And I should take the opportunity to plug, we have  an analytical tool called PIMCO Pro where we can do exactly that on behalf of clients is help them analyze the optimization of their portfolio, or at least the attempted, the potential optimization of their portfolio. And it's a great point you're making. I hadn't really thought about it in those terms, but you can free up risk capacity to express an equity position if you've got some downside hedging, if you will, through the fixed income portfolio, which cash simply just by its nature, doesn't provide. It's really interesting.

You mentioned private markets, and, you know, when we talk about portfolio allocation, you know, in the wealth management space, less so in the institutional space, but really the notion of a private market allocation of any significance for the vast majority of wealth investors, that's a relatively new concept to add to your portfolio optimization.

And there is a lot of product out there. There's a lot of money being raised in private strategies in the wealth space. I am curious to what extent you think that recency bias, you mentioned, the trailing track record, the floating rate exposures in a rising rate environment, how excited or cautious ought individual investors to be with this new option that's placed in front of them? 

DAN IVASCYN: Yeah well, there's a lot there. I probably should have mentioned this earlier. No, no, it's great. I could, we could, we could spend a long time, this is a very interesting area of the market. I should have mentioned this earlier. You know, I was, you know, trading private assets and private placements for PIMCO when I first joined the firm, you know, back in 98, used to focus on commercial mortgages, these RTC private placements, you know, that, you know were created during or coming outta the savings loan crisis. So I think the key point here is that you know, private markets are less liquid than public markets.

They're an important part of the opportunity set, and there's all different types of flavors of risk. So I think it makes sense in a diversified portfolio to have some exposure to public markets, some exposure to private markets. They'll realize at times when spreads are tight in general, and credit spreads are near historical tights at the moment, you tend to get less compensation for giving up liquidity and moving into the private markets.

Also, I think it's important to note, because certain segments of the private markets, or actually most segments of the credit markets period, have performed so well. You have a lot of money pouring into those areas. And what that's leading to is a bit of a supply demand imbalance, which is leading to even more compressed spreads of the private markets or weaker document protection than you'd like right now, that's a bigger concern in the lower quality areas of the market, the areas of the market that are going to be much more economically sensitive in terms of ongoing performance.

And I think also when you look at lower quality, more leveraged companies, these are the types of companies that are being disrupted by all this technological innovation and resulting uncertainty. So, you know, being nimble, being able to make active investment decisions is still pretty darn important. My, my old, you know, colleague and mentor, Scott Simon used to tell me, you know, 'Don't give up'.

GREG HALL: Scott who managed the mortgage...

DAN IVASCYN: Simon's a mortgage. And he'd say, you know, a lot of, you know, perhaps overly simplistic sort of rules of thumb that I still think about today. You know, just, you know, don't make it more complicated than it needs to be. Make sure if you're giving up liquidity, you're not just giving it up for the sake of giving it up, that you're getting paid to take that risk. And there's certain areas of the market that we think make sense.

There's certain deals, you know, in the context of markets that are becoming increasingly crowded that still makes sense. And I think the bottom line in general, anytime you're talking about the more economically sensitive areas of the market, you want to be a little bit cautious, a little bit more selective today than you would a year or two ago when you had a lot more spread compensation. 

GREG HALL: I think I worry sometimes that you know, the narrative is so good. The banks have pulled back after the financial crisis, there was for a time, and may still be a, you know, a very legitimate gap in funding available to those companies that you're talking to, there was a gap in funding available to private equity sponsors, but the notion of private origination, you just made the point, right?

You were doing it in 1998, it's not a new concept, it's just, it's never been at this scale before. And to a degree, it's somewhat untested through a cycle. 'cause it's mostly an innovation of the last 10 years.

DAN IVASCYN: Yes. And I think also though, it's important to note that we have been in highly favorable, we've been in a highly favorable environment for credit risk and equity risk in general. It's quite remarkable. There's a, you know, a chart we had at our recent client conference. I didn't believe it was true when I first saw it, and I should have, but it went back and looked at returns within the deeper, the lower quality credit markets going all the way back to the launch of the high yield market in the early eighties.

And basically what the chart said was that you had periods where you generated pretty attractive returns in those segments of the market, public or private, and then you'd have an event you'd give back, you know, multiple years of incremental return. But the bottom line is going back from the early eighties to 2008 as an example, you didn't get paid a lot over that multi-decade period for taking lower quality credit risk. If you look at 2009 to the present, it's been almost a one-way train, where investors got paid lower

GREG HALL: Quality being like high yield...

DAN IVASCYN: Perform lower qualities.

GREG HALL: And the middle market private credit sponsor lending. Am I interpreting you? I don't wanna...

DAN IVASCYN: Yeah, no, you gotta perfectly right. And then I think another important point is that during the global financial crisis, it was asset-backed lending, mortgage lending. Excessive risk taking from the banks that caused a lot of the problems, literally across the global economy. And as I, people have probably heard me say repeatedly, regulators hate bailing out the same sectors twice.

So you've had a situation where, of course, you know there's been an aggressive regulatory response to lending against the home consumer lending other forms of asset-backed lending because they did cause all the problems, you know, back during the GFC than a lot of regulation of the banks, the non-financial, lower quality corporate sectors avoided that regulatory scrutiny. So perhaps not surprisingly, when you look on the chart, the growth, you've had one segment of the market grow, or not much at all.

Even shrink in, in real terms. You've had this massive growth in the senior secured loan space in what we called out the mid-market lending arena. And again, I think because of that growth and because of some of the market share battles going on in that space you have a little bit of complacency there. At a minimum, it's the least interesting area of the credit markets. 

And we think one of the most obvious asset allocation decisions advisors could make on behalf of clients is to target those areas that have arguably been overregulated that benefit from strong fundamentals, strong investor protections, in a go-go economy where earnings are growing significantly.

It's very hard for an investor to tell the difference between more resilient areas of the market and the less resilient areas. We are super confident that when you have a negative economic shock, when you have a recession in the future, you're gonna see a meaningful performance gap.

So it's not so much private's bad, public's good. It's really a situation where you have to look at the sub-sectors of the market, look at these deals in great detail and just acknowledge and realize that it's a frothy underwriting environment. Do your good old fashioned credit work, and you could put together a diversified portfolio.

And again, an area of conviction of ours is still focused on the asset backed space, lend to the consumer that has so much equity trapped in their property, and resist the temptation of being too aggressive in the mid-market, lower quality lending space.

GREG HALL: And importantly you feel like that both in public and private, it's about the underlying asset quality. It's not about the form of lending that we're doing, whether we're doing it in a bond or in, you know, private loan.

DAN IVASCYN: That's right! And I think in addition to the words we, you know, we'll share today if you look at our diversified portfolios, we have strategies that focus on public markets, we have strategies focusing on private markets, then we have strategies that have a broad opportunity set where we can do both.

Everything I just said in terms of our asset allocation preferences are quite consistent whether you're talking about our public daily liquidity strategies or other forms of semi-liquid vehicles, permanent capital vehicles, you know, we, you know, have a consistency and a very, very high degree of conviction and are positioned accordingly on behalf of clients.

Look, as I mentioned before, you know, if this economy continues to grow at two plus percent, if we continue to have, you know, significant earnings growth and stocks, you know, continue to perform well, it won't matter. If you do have some type of negative growth shock, negative earnings shock, investors will see the difference. And we think it's a really, really obvious asset allocation decision that clients can make today. Happy to talk about, obviously in a lot more detail on follow up.

GREG HALL: Yeah, of course. I, one thing, maybe just as a last question on this point that I struggle to articulate, I've been working on, I bet you can do it a lot better than I can, but I do feel like there are areas of, whether it's the private credit market or just the equity markets generally, that are far more predicated on this need for rates to come down quickly in order for them to achieve what they've set out to achieve.

If you own, if you did a lot of private real estate deals going back several years ago, and you wanna achieve a return based on where you under wrote them, if you're betting on a tech company and cash flows way out, you know, into the future, you're far more sensitive to the outlook for rates. And then I look at what we do and then the core of our business.

And I think, well, if we're higher for longer, like you said earlier in, we're fine, we will continue to collect a great, you know, attractive rate of return you know, we'll achieve hopefully, you know, our own goals. But it does seem to me that there's parts of the economy and parts of the investment landscape that are far more levered to a very quick Fed move downward than we are right now.

DAN IVASCYN: Well, I, that's right. And you know, I think this is very true of the floating rate credit markets in general, both corporate and commercial real estate lending markets. A big stock of this issuance occurred when policy rates were near zero. And we've had a massive rate shock.

And they're more fragile or sensitive areas of the commercial real estate markets or the lower quality direct lending markets, where borrowers have taken out floating rate debt, they're not well hedged versus rates, and they were counting on rates coming down a lot more than they're probably gonna come down.

Now, again, if you combine elevated rates because of higher and lingering inflation with some economic weakness, you're gonna see problems develop in those sectors. And, you know, we across a lot of our strategies stand poised and ready to take advantage of those periods of stress and are doing so currently.

You see it on a global basis, as an example. The United States have a, has a very unique mortgage market. Fixed rate, but fixed rate for 30 years. Very uncommon in the global context. Most other economies have consumer lending markets that are mostly floating rate in nature.

And you see the US consumer, US households holding up much better than the rest of the world, a little bit harder to see, and these could be masked through extensions and other asset management techniques, but you have similar signs of subtle or not so subtle stress within commercial real estate, within the direct lending markets.

So it's not, you know, like as if there's a catastrophe around the corner, but there is strain and stress that you don't see in the fixed rate lending markets where companies have locked in very low rates for extended periods of time, where you haven't seen the rapid growth and where underwriting standards have stayed much, much more solid.

So this is a very, very subtle dynamic in the market today. It's a little bit masked by, you know, the strong historical performance, but it gets back to this, you know, fairly obvious asset allocation decision that clients can make where you hope you don't need the resiliency.

You know, we hope that, you know, the economy remains strong. You know, we hope that there aren't negative growth shocks of a geopolitical nature. We hope equities continue to go, you know, go up.

GREG HALL: Yeah. Yeah.

DAN IVASCYN: But sometimes they don't. And I think this is the unique opportunity in the current environment where you can maintain an attractive base case return and protect the downside. And if I wish were to sum up what my job is as a CIO and what our job is collectively at PIMCO is it's to provide attractive returns with appropriate resiliency and downside protection.

And the exciting part is that, yeah, there's plenty of uncertainty, you know, we talked about in our recent cyclical outlook, but valuations are attractive and there's all this, you know, localized volatility and opportunity to do, you know, really smart things on behalf of investors. And again, you know, create not only an attractive base case return, but a resilient profile as well.

GREG HALL: Speaking of uncertainty we are, I think two days past inauguration day, there's obviously been a flurry of news and actions and executive orders. You mentioned earlier we've got a base case of a soft landing with some fat tails or fatter tails to either side of it. Anything you've seen in the last few days that makes you think that we could be in for more volatility than we'd prejudged or less volatility?

DAN IVASCYN: Yeah, it's early. And I think an important point is although we have a constructive view on the economy we think that, you know, there's a decent chance we achieve a soft landing that's mostly priced in to markets, so, me saying that should not just be, you know, an all-clear sign to take lots of risks because there's a lot of inherent optimism. In terms of volatility, you know, we've had a bit of a relief rally.

Early signs from the administration are that they may take a more measured approach to tariffs, they may, I think, you know, in a higher level sense, be willing to calibrate their policy over the short term to market signals or signals from central banks as another example. But this is gonna be a big source of uncertainty.

You have a very, very unique situation where the economy's quite strong, inflation's above central bank targets. The Fed's trying to engineer a slight slowdown to achieve that soft landing, which is in reach. And you have a set of Trump policies that may be great for growth over the long term  but could lead to further overheating over the short term.

So again, there's this very, very difficult situation for policy makers now, where what may be good over a multi-year basis may not be so good over the short term, and, you know, we as market participants are really, really focusing on the administration's willingness to calibrate policy to some degree to try to avoid the Fed having to come back into play,  to avoid some, some risks of, you know, higher long-term interest rates, which could quickly migrate into some problems for equity markets, commercial real estate markets, private lending markets as well.

So, you know, the administration you know, has a lot of you know, really good economic resources there. But we're spending a lot of time, and I know others in the industry are spending a lot of time focusing on policy prioritization, willingness to calibrate.

We, so we don't know for sure, but I want to, you know, probably go back to the main point, relative to when the Fed has started cutting short term rates, longer term interest rates are almost a hundred basis points higher. So there's this cushion, you don't need to get it all right. We can live with some volatility. We can live with some more aggressive tariff activity.

GREG HALL: I think, I don't mean to interrupt, I'm sorry, but I, you know, I also think that, you know, again, you know, observing you, you know, from my seat, we've been capitalizing on volatility. One of the questions we get from advisors kind of frequently is just given our size, are we nimble enough?

Do we have the liquidity we need to actually express views? And I know you take a long-term view and you're not, you know, you're not tied to your Bloomberg every day, but have you felt any constraints and moving portfolios around to adapt to the ever-changing conditions we see? 

DAN IVASCYN: So short answer, no. Maybe, lemme comment on the market side. 'cause there's, there are these narratives that are a little bit crazy that are going around that there's, you know, no liquidity back in the public bond markets. I've been pleased that there've been some independent media reports and we do our own work and we trade these markets every day. Public markets haven't been this liquid in a very long time.

A lot of this is the ETFs, ETF flows portfolio trading that makes it quite easy to express views. We also like the fact that there are more and more ETFs that disclose what they're doing to us every single day. Many of them are rules-based. They buy a particular option, they sell an option, they buy a particular bond on a certain date and time.

And we can watch it in real time. It gives us a lot of opportunity to trade around these strategies that don't make relative value views. They just do what they say they're gonna do on the same day. Or they do things and they telegraph it in the marketplace. So not only is the transactional liquidity good, there's a lot of structural inefficiency in markets to exploit. So that's point one.

Point two, it's great to be large. And I've said this for many, many years and I don't know how I would plot it on the graph precisely, but we have a strong sense that it's good to be really, really small or really, really big, a bit more challenging to be mid-sized.

But what we try to do, given our size, given the size of some of our strategies is to leverage that, find ways to source unique opportunities, be able to provide comprehensive solutions to the sellers of risk, be able to drive transaction volume in a customized fashion to create value for our clients.

Retain asset management decisions, obtain control. One of the big challenges we have in a covenant light world is that no one has control. Actually, the borrower has a lot more control than the lender. And size allows you to leverage that dynamic and benefit the investor. And then last but not least, we came out of a period pre-COVID where you had massive global volatility suppression from policymakers.

They were expanding balance sheet. They were providing accommodation wherever possible to suppress volatility. Today, exact opposites true. De-globalization themes, central banks retracting liquidity, or at least reducing balance sheet. You're back to a time that resembles when I started in this business more where markets have to stand on their own, the so-called bond vigilantes get paid to make relative decisions.

And when you look at performance across our active strategies the last few years, whether you're talking about hedge funds, traditional mutual funds, or other vehicles, it's been very target rich.

And we expect that to continue. And what's nice about that is that you don't have to place big bets on duration or yield curve. You don't have to have all of your interest rate risk here in the United States where deficits are a bit concerning. Not overly alarming.

You know, given, you know, the United States global reserve currency status. But the great thing about the market today is that you can go and invest at even yield in certain parts of the world that have a very, very strong fiscal picture. Australia as an example, even the UK, although volatile looks quite interesting as a diversifier. So this is a pretty exciting time.

GREG HALL: I think I've heard you say you know, happy to lend to the US government with a five year tenure time horizon, 20, 30 years, you know, exacts a different price, right? And I think that that's very much in keeping, there's a lot of advisors out there who are very concerned about debt and deficits, and I'm conscious of time, and we've got rich next month, and so we, you know, we can tackle that with him.

We talked a little bit about it with Libby Cantrill a couple of months ago. But do you, you know, in terms of kind of your duration posturing at this point, maybe we can end on this. How are you thinking about rate exposure and portfolios?

DAN IVASCYN: Yeah, a few points. One there's much better value back in the market. So you know, we have a bit more interest rate risk today, and some of our strategies were a little bit overweight, interest rate exposure and more flexible strategies. We're still defensive, but more constructive on rate risk in general. US deficits are high.

They can't stay this high without the government needing to pay more and more to borrow at least over the longer term. But we also think that, you know, the United States government has time on their side, and it's not all negative, I know people focus on, 'Wow, deficits are high! You know, is there a crisis around the corner?' We don't think so. But also because deficits are high, we get to lend money to the US government at a much higher rate than we would otherwise.

So the term premium or intermediate rates are higher than they would've been. And then back in those days when deficits were much lower and inflation was much lower yields are super, super low. So we do think that, although the government has been less responsible than they should be, it allows us as high quality bond investors to extract higher yield. So I think that's the second point, then the last point is just this concept of global diversification.

Even without taking currency exposure today, you don't have to solely own the United States. You don't have to extend out into 30 year maturities. You can stay in shorter maturities here in the United States, and you can buy some high quality interest rate exposure across the rest of the world. High quality developed markets, emerging markets, and that's exactly what we've been doing across our total return portfolios, income portfolios, global portfolios.

So again, we're not the only game in town. And you know, advice for policy makers is that if they want to continue to be able to borrow at relatively low real interest rates they're gonna have to address this deficit picture up at some point, because we will continue to shift our exposure into some higher quality markets or markets, you know, with a much more sound fiscal picture. And, and we're not alone, of course, in that overall thinking.

GREG HALL: All right. There so many things that we didn't get to, but I do think your time and attention's probably required elsewhere and maybe if you're up to it, we'll ask you back for a mid-year check in on some of these topics because this was fabulous. We really appreciate it! I think advisors will get a lot out of it. And you know this, but you know, this is a time of year. I think it's so important.

You know, they're out talking to their clients, they're making their plans for the year. We wanna arm them with as many salient thoughts as we possibly can to help them, you know, make these tough decisions in volatile time. So Dan, thanks so much for your time! Thanks everybody for joining us and with that, we'll let you go!

DAN IVASCYN: Great, thanks, Greg! Happy New Year to everyone, and again, please share feedback! And again, excited to have, you know, more direct conversations throughout the year with everyone, but it's great to spend some time with you today.  Appreciate it! Thank you!

GREG HALL: So that was Dan Ivascyn, Group CIO. Terrific conversation, spanning a lot of different topics. A few things we didn't even get to and we'll tackle in future episodes. If you want to dive a little bit deeper with Dan on some of his experiences at PIMCO, his experiences in markets, the culture here, the investment process here, really excellent conversation he had with Ana Marshall CIO of the Hewlett Foundation on the Capital Allocators Podcast run by our friend Ted Seides, that was in the summer of 2023, if I'm not mistaken.

We'll link to it in the show notes, but that's a great exploration of, I think a lot of the processes and ways of thinking that make Dan special and make PIMCO special with uncertainty being certain per our cyclical outlook.

A terrific time for us to stay in, in close communication with you and for you to stay in close communication with your clients. So please, please reach out to us with any questions or needs that we can be helpful with as you formulate your 2025 plans. As I may have mentioned earlier in the podcast, next month, we will be welcoming former vice chair of the Federal Reserve, Rich Clarida. He's a global economic advisor to PIMCO. He runs our investment forum process and we'll do a deep dive with him on Fed policy and the outlook for rates in the United States and abroad.

I also wanted to note that we're cooking up some new ideas for pod episodes on specific topics and threads that'll occur in addition to this monthly episode that we do. We'll let you know more about those as they take shape over the course of the year. As always, please, please visit us @pimco.com for a wealth of information on the topics we've discussed today and quite a bit more. If you identify yourself there as a financial advisor, you'll be taken to our Advisor Forum site, which is specifically geared to the FA community. Thanks so much and see you soon!