Market Update with Dan Ivascyn – PIMCO Group CIO

Stay tuned after the conclusion of the podcast for additional important information.

Greg Hall: Well, welcome everybody, to another edition of Accrued Interest PIMCO's podcast dedicated to financial advisors and their clients. This is an extra credit edition. You can think of this as volume two in our tariff volatility series. Yesterday we were fortunate enough to record with Libby Cantrill, our head of U.S. public policy, and Tiffany Wilding, one of our senior economists here at PIMCO.

Today, we bring you a conversation between Dan Ivascyn, our group CIO, and Esteban Burbano, who's a managing director. He works in our product strategy team and covers our flexible strategies globally. It's a really terrific conversation. But let me just note upfront one, I'm joined by Brian Kyle. Brian, for those of you who haven't spent any time with him, Brian is a senior vice president in our wealth group. He is responsible for so much of the material and tools that we put out that's advisors specific. He spends a lot of time out in the field with advisors. He's got a great feel for what you all go through on a day-to-day basis. And a really strong commitment to bringing you the tools and the information you need to do your jobs better each day.

So, Brian, thanks for joining me for this quick little intro to Dan's conversation.

Brian Kyle: Thanks for having me.

Greg: It's a pleasure to have you here. What Brian and I just wanted to do is set the stage a little bit. So what we're bringing you in in in today's episode is webcast that Dan and Esteban did earlier and I think this is inevitable, in hindsight, but they recorded this webcast.

They spent about an hour. It's really penetrating. It's really thoughtful. It's a great listen. And of course not within 30 minutes after they finished, I think President Trump announced, a 90 day pause on most of the tariffs, not those affecting China, of course, as you'll all be aware of. And so the question is of what relevance is this conversation given that change, and I think it's still well worth, a listen or we wouldn't put it out to you.

Dan in particular goes really deep on his thoughts about relative value between different sectors within fixed income, certainly between fixed income and the equity markets. He lays out a number of thoughts about scenarios for rates going forward depending on different policy actions. Gives you a sense of how he's thinking about the interplay between duration and other forms of risk in portfolios that I think you'll find instructive as you try to put together client portfolios.

Brian, anything from the conversation that really hit you?

Brian Kyle: Yeah, absolutely. I think, first, we all see it, right? Uncertainty, volatility creates a lot of anxiety, a lot of stress for investors, and for an advisor at that makes your job harder. But even more important, and similarly, and listening to Dan, I think he does in this conversation what's the best advisors do, which is takes a little bit of a step back with a very calm perspective, and lays out how we're thinking about building portfolios that can weather these storms, right?

Be resilient and make sure they're delivering for clients. And that's a real testament to our investment process. And again, the approach that many advisors take. So, his orientation for the longer term, I think definitely makes this conversation relevant. And it did strike me that the optimism and calm that he brought to the conversation, you can tell he is excited about some of the opportunity.

Greg Hall: You're absolutely right. I think that on the one hand, economic disruption is unpleasant for a lot of people. It certainly has been for most of the advisors we speak to, certainly for their clients and the underlying portfolios. On the other hand, it does lead to opportunities. And if you've spent the time in markets that Dan has and you've invested in building that playbook, when those opportunities present themselves, you can stay calm and take advantage of them.

And so for him to express that optimism, I guess I shouldn't be surprised. I did feel reassured that he and the team are out looking for interesting opportunities right now. And I think it's just a good representation, and a good walk through of the opportunities that are arriving or arising in markets right now.

And then he makes the other point that I think is really key, is that even extrapolating post the end of the webcast when President Trump made the announcement today, this is even more true, the ten years back at levels that we saw just a couple of months ago, equities are recovering today.

And so valuations that we thought were stretched even with the recent downdraft are now that much more. So a lot of the conditions that we've been talking about now for the last couple of quarters, despite the volatility, are intact. All the more reason to listen to Dan and hear his thoughts here.

Brian Kyle: Yeah, Dan and Esteban land the discussion on the most frequent question we have been hearing. What should I do? What should I do from a portfolio positioning stand-point given all this volatility? And the key takeaway I had was that we think that yields are attractive at these levels and that may potentially mean that bonds can deliver for investors in a wide range of scenarios

Greg Hall: Getting a little bit more attractive in trading today, which again, this is a scenario that, we're prepared for and are taking advantage of. So anyways, enough of Brian and I talking about Dan talking to you. Let's let Dan, talk to you. Please enjoy. This episode, know that we're doing our best to bring you timely information and updates and to keep pace with developments and in the market and, as always, visit us at pimco.com.

If you identify yourself as a financial advisor, you can go to Advisor Forum, which is our destination for you, to find the information you need as quickly and efficiently as possible. We will be with you again in our next, regularly scheduled edition of Accrued Interest, with David Hammer, who is our head of municipal bonds.

Another area where opportunities are showing themselves amidst this volatility. So that's pretty timely as well. Thank you. And of course good luck in these markets. We wish you all well. We'll talk to you soon.

Esteban Burbano: Hi everyone. Thank you for joining us for this live market update. My name is Esteban Burbano and I'm a fixed income strategist here at PIMCO. Today I'm joined by Dan Ivascyn, PIMCO's Group CIO and a member of our executive and investment committees. He's a 25-year PIMCO veteran and leads our income, credit, hedge fund and mortgage opportunity strategies. Given the recent market moves, we wanted to provide you with a quick update on our latest thinking. So we'll break up this session into three sections. First, we'll discuss recent market moves and key factors to watch going forward. Second, we'll discuss our views on potential asset allocation implications for our clients given the change in macro environment. And third, we'll discuss where we're finding opportunities to deploy capital in this environment. Dan, welcome.

Dan Ivascyn: Thanks, Esteban. Let me start by thanking all the clients. It's a busy day in markets, busy day following policy priorities. But as always, we really appreciate the relationship. We'll cover some high-level points today, and then look over the coming days to get into a lot more details across the various strategies that we that we run on your behalf. But glad to be here.

Esteban Burbano: So we have a lot to cover. Obviously, a lot going on in the markets today given the recent changes in US policy. Just to recap, the equity markets, S&P down almost 20% since the highs in February. High yield spreads up almost 200 basis points. Ten-year Treasury yield moves have been quite significant, dipping below 4% earlier this week, and now at 4.5%. First question is what do you make of these market moves, especially within the context of this macro environment?

Dan Ivascyn: Sure. I could talk for the rest of the allotted time based on this very unique macro environment. But let me hit the high points. One, this environment is very unique. We've been doing this here within a lot of members of the existing team for, as you mentioned, over 25 years, and the firm 50 plus years. And this is a unique period of volatility in that it's not related to an exogenous shock. It's related to a conscious policy decision and a style of implementation that's both a challenge but also an opportunity for markets to settle down if we get some clarity on the overall situation.

But basically, we talked about this at the beginning of the year. We expected policy uncertainty with the Trump administration. We knew that a key priority was to reset global trade over time. Also reduce tax burden regulations, which can very well have a positive impact on the economy. And we had a sense tariffs were coming first. We also know from monitoring Trump's priorities for several decades that he's very serious about the tariff issue. In fact, he started talking about this back in the 80s when he was a private citizen. But we, as well as the market, were surprised by just the absolute level of the tariffs that were introduced, the ways that these calculations were done. The way that this messaging has been delivered.

And as we said, the moment that the Trump administration won reelection, a key focus area for us in the markets was going to be around this administration's ability or willingness to calibrate their policy to current realities. We still have inflation above target. We still had a fed and other central banks around the world trying to engineer a soft landing. So what may be good over the long term could be a bit at odds with the current economic and financial market realities.

And this tariff announcement and the subsequent escalation, particularly with the Chinese and a few other trading partners has created significant uncertainty. We also talked about the fact that equity valuations were very expensive, both in an absolute sense. US equities screening more expensive than other parts of the world and screening quite expensive relative to the starting point for nominal or real interest rates. Credit spreads, as we know, came into this period very tight. We've had multiple years really going back to the GFC where it's been a nearly one-way road in terms of lending to lower quality borrowers. A lot of this risk is not marked to market. So those challenges will likely be right around the corner. But a degree of credit complacency expressed by weaker covenants in very, very tight spreads. So we went into this period with less margin for error given stretched valuations. And we've seen, as you mentioned, a significant pullback in equities, actually credit markets that are reasonably well behaved up until this point, and a lot of volatility on the interest rate side.

Now just a couple of macro points here. We've done a lot of work. And it's been hard to keep up with the ever-changing set of policies and escalation. We even have the Europeans escalating today. We've been looking to update our growth in our inflation data as quickly as we can. And again, with the caveat being there's a lot of uncertainty and it's probably going to be a lot worse in terms of the initial shock relative to what traditional economic models may suggest. And the bottom line is, if these policies hold, we do think we'll have a recession. We think we very well may be in a recession currently.

We think at least over the short term, the price level adjustment will be sufficient to get inflation calculated inflation up above 4% again. So this is an environment where you've had change. You've had change very, very quickly. The delivery was more aggressive than anticipated. So we're going to have volatility. And we're going to have repricing. I think the key is where do we go from here. We had a view we mentioned again earlier in the year. I think our cyclical forum research piece earlier in the year was entitled uncertainty is certain. Maybe a little bit of a cheesier weak title, but I think we got it right to say the least. Even a little more uncertainty than we anticipated.

But the base case with which represents a narrowing part of the probability distribution, is that there will be negotiations. We will get some form of resolution with many of our trading partners, where we did place significant and higher than anticipated reciprocal tariffs on those countries. The 10% tariffs probably here to stay. Tension with China, although there's a decent chance for some de-escalation in the coming weeks, are likely here to stay. More targeted tariffs on select industries likely here to stay. But the base case view is that we will begin to see signs of a negotiated settlement across many of the trading partners now that have tariffs that are quite significant. And we're talking about 30% effective tariff rates today. You got to go back to the early 1900s to get those types of levels. So they shouldn't be minimized.

And then the last point, I'll make maybe two points. One on valuations. You mentioned a lot of volatility in equity markets, mostly down. Credit spreads have widened a bit. But you have very, very strong technicals, arguably still a little bit of complacency or supply demand imbalances there, keeping spreads tight. That's an area which we may talk about more, but where we remain more cautious. But bonds, and I think it's important to put this into perspective, because the last few days have been rough. We have an auction coming up at the end of this call, which could create even more volatility. But the point there is that it feels real bad the last few days. But the ten-year Treasury yields back to the levels that we saw in mid-February. Just a few quarters ago, we had higher levels. And then the 30-year bonds retraced back to a level generally near where we were in January.

So it's been volatile. But we still have a situation where treasury yields, although they're high, they haven't become extremely dislocated yet. But again, that's an area that we're focusing on that you asked about the path for fixed income, as we've been saying time and time again. Yeah, it's rough. Yes, it can be a bumpy road. But starting yields in the higher quality areas of the fixed income markets are attractive. Even if inflation were to be sustained comfortably above central bank targets. So this sell off has again created opportunity where you can generate returns without having to lock up your money for an extended period of time, without having to take a lot of economically sensitive risk. And again, it looks attractive absolute and relative to other segments of the market.

Esteban Burbano: Yeah, it's the starting yields are going to be very important. The Barclays - the Bloomberg, excuse me, for example, even though there's been a lot of volatility still is softer value year to date. I want to touch on rates. And specifically, one question that we get a lot is on what is the fed going to do given this sort of balancing act between growth and inflation. The numbers you mentioned, a potential for recession and inflation ticking higher, what's your latest view there?

Dan Ivascyn: Yeah. So it's a few points there. Maybe I'll mention a few other other central banks in the process. But the fed is monitoring the situation. It's a challenging situation for them. We have stagflationary themes here in the current economy. Again, our forecast for inflation, if these tariffs hold is going to be north of 4%, even at least over the short term. And even if you have a negotiated settlement with key trading partners, it's likely to increase and remain elevated for longer. Also, as Powell says over and over again in good old fashioned central bankers say over and over again, it's all about inflationary expectations. And although tariffs could lead to a one-time price level adjustment, from a textbook perspective, the fact that we've had inflation linger higher for longer for an extended period of time does increase the risks that these price increases become more embedded in the United States, but also other parts of the world.

So the fed has a challenge. We think that they're going to look for more clarity around this tariff policy and other policies with the administration. Again, a positive around the corner will be the likelihood in a very strong likelihood of tax relief and perhaps targeted tax relief towards the lower to the middle-income households and the positive benefits of this deregulatory impulse. So the bottom line is we think they're going to be patient to the degree that markets continue to function in an orderly manner. We do think that they will look at market functioning as they have in the past, as other central banks do. And to the extent that all of this very rapid change leads to periods where markets become more volatile than they like, they may, if they see some deterioration in some of those metrics, look to support markets.

But our best sense is they will do so in the name of market stability. They're likely to be very, very careful in appearing like they're providing more direct stimulus to the economy at a time where inflation is running above central bank targets. So we think they stand ready. They're monitoring the situation. But so far, they're willing to be patient. They're not just looking at the financial markets. They're going to be looking at the degree in which this financial market volatility begins to flow through to the real economy. And it will, if we don't address some of this uncertainty and some of this trade friction, even if we want to be tough over the long term, if we don't take a time out, so to speak, or address it soon, this financial market volatility is absolutely going to begin to impact the real economy impact credit, particularly credit across small businesses, mid-market companies. And a lot of those companies have fairly aggressive capital structures, so they're watching. But the fed put, so to speak, a bit more out of the money than it has been in prior crisis periods.

Esteban Burbano: And I want to touch on this point that you just mentioned, which is well-functioning markets, right? One question that we're also getting is what are some of the technical factors that are perhaps sort of in your mind or might be affecting how the Treasury market is working, or even the broader financial markets are working?

Dan Ivascyn: Sure. Well, the markets are functioning fine. They're just moving around a lot right here. So like any type of crisis period, and we've been through many, you'll tend to get people selling higher quality assets early on de-risking, deleveraging, so to speak. And that has led to some widening in the higher quality segments of the market. If that's orderly, that is typically the path that markets take initially, but there's other leverage in the system. We refer to it as leverage lending, private credit, higher yielding lending, lending to more credit sensitive borrowers. This is a very, very challenging environment, almost close to a worst-case scenario for more economically sensitive lending. A stagflationary shock at a time where covenants are weak, spreads are tight. There's arguably a bit of complacency in these markets, and we haven't had that environment for a very, very long time.

These environments, these shocks to the economy were much more common back in the 1980s, 1990s, 2000 period. So those that were trading back then, remember this situation. But there is a lot of fragility there. And people can get lulled into the fact that because prices aren't moving, there aren't challenges there, but that typically comes a bit later in the cycle, something that we're watching in an area that we've talked about now for several quarters. One of the reasons why we've been quite cautious, quite defensive in taking more economically sensitive exposure. One of the reasons why we're up in quality in a lot of these assets that may underperform locally, their spreads may widen, but they're default resistant. You're talking about spread widening, not real material risk of downgrades or defaults. And we continue to think in this environment it makes sense to stay resilient. Stay up in quality. So again, all those spreads have widened. They haven't necessarily cheapened given the significant uncertainty. And we think the fed and other investors are monitoring all these areas very, very carefully.

Esteban Burbano: Right. And just to follow on that train of thought, and let's start big picture. One of the key questions we're getting is what are the asset allocation implications? And so, before we dive into opportunities into the fixed income market, let's just talk about a tradeoff between like equities versus bonds versus cash. We are getting that a lot of questions given especially the selloff in the equity markets. What do you make of this, how are you thinking about like the trade-offs? And what would you say are the key factors that are in your mind?

Dan Ivascyn: Yeah. So we've been talking about this again for quite some time. Just I guess a couple of quarters or so ago or a handful of months ago, equities got under some traditional valuation measures, the most expensive they've ever been versus bonds. They have underperformed fixed income they've traded down in an absolute sense. So from a long-term asset allocation perspective, they're looking a bit better. But when you look at equity multiples today, when you look at high quality fixed income yields, especially the backup that we've - after the backup we've seen the last few trading sessions, we're back to levels where equities only incrementally look more attractive versus fixed income.

So again, a lot of noise. But when you get these second order effects, if you end up seeing the economic deterioration and credit deterioration that we expect, you very well may see a pretty strong bid or source of demand for higher quality instruments. And that's not just treasuries. I think this is a very, very important point. We're in a very, very different world than we were in a few years ago, both from a macroeconomic and a geopolitical perspective, but also from a valuation perspective. So you can and we have across strategies been steadily diversifying away from treasuries, not because of a major near-term concern around debt sustainability and other related frictions, but because you can get equally attractive and sometimes better yields in other high-quality areas of the market.

So the bottom line is that bonds still look like the cheapest asset when compared to cash in equities. Equities have underperformed a bit more recently. And then when you get into that sort of other bucket, the credit sensitive assets as well, they've widened. But they haven't widened nearly as much as they arguably should based on some of the other warning signs that we see in other areas of the market. And I forgot to mention this earlier. Maybe I should mention it now. Why is that the case? Why are equities still trading at elevated valuations? Why are credit spreads still trading tighter than we would expect? 

One reason is very powerful technicals. It's like a coil that's been tightened up. So much credit has been issued in areas where it's not typical to mark to market that risk, that you're likely to see it lie dormant, and then to the extent you see deterioration or people react to the fact that in the public markets now, in some cases, you have an outright yield advantage, you could see that market react. So that's the technical reason.

The second reason, and I think this is important for all investors on the call today, as I started saying earlier, what's so unique about this period of volatility is that it's primarily based on a set of clear policy decisions from the US administration and the resulting uncertainty as to what the priorities will be on a go forward basis, the willingness to calibrate policy, the willingness to delay action, to look for a more market stabilizing set of solutions. If we don't get that, given the linkages between the financial and the real economy, there's really a risk of harder landing scenarios or a recession and maybe a much more challenging recession than we've experienced in a long time.

But the good news for markets is that with some clarity, with some announcements around the willingness to take a longer-term policy view, markets can stabilize and you can see a significant snapback, particularly in those higher quality areas of the market that have widened more recently. So this is a situation where it feels real bad right now. When you've looked at crisis periods in the past, it was hard to figure out what risk people had, what the solution would be, like the global financial crisis. Today, the solution is fairly straightforward as to whether the solution gets implemented. Again, lots of uncertainty, but this is a very, very different environment. And one why, despite the more volatile environment than we've grown accustomed to, we are optimistic, at least given the starting valuations today, particularly within the higher quality segment of the fixed income opportunity set.

Esteban Burbano: Right, because of the - it's kind of like a middle of the road, right? Like you can have some certain positive news that will help sort of risk assets, including high quality assets as well. So let's shift gears a little bit and talk about perhaps what are we doing in our portfolios at a very wide level. Right. First, let's talk about interest rate exposure duration in our portfolios. And then we can shift gears and talk a little bit more about the credit markets. How are you thinking about duration positioning, not just in the US, but also as we look at policy divergence across the world, perhaps different growth paths, how are you thinking about positioning our portfolios?

Dan Ivascyn: Yeah. So we just published our cyclical outlook recently. I believe my colleagues, Tiffany Wilding and Mohit Mittal shared their update. And that was before this bout of extreme volatility after the tariff announcement. But in general, the same themes we've been talking about for several quarters holds true. From an interest rate perspective, we're a little bit overweight in most of our benchmark strategies and some of the more absolute return-oriented strategies, some of the strategies I tend to be more involved in. We're a bit more defensive given that we have a broad global opportunity set. We've had a little bit less interest rate exposure, and so far, we haven't made meaningful change.

In general, across PIMCO, we're monitoring markets to the extent that we see some overshooting, which could happen of a technical variety the coming weeks, we would certainly consider and have room to add a bit more interest rate exposure, but we're mainly keeping an ever so slight overweight. We're concentrating our interest rate exposure in the front end of yield curves. There's just again, consistent with extreme macro and policy uncertainty, we've looked to underweight the long end of the maturity spectrum favoring more intermediate term maturities defined loosely as five-year, seven-year type maturities. And we have steadily diversified some of our interest rate risk outside the United States and some of these other countries that I mentioned briefly earlier.

These types of tariffs can be quite disinflationary outside the United States. Yes, our economy will suffer. Other segments of our investment opportunity set will suffer as well. So Germany, even Japan to some degree, the United Kingdom, Australia is an example of a very high-quality market that offers very attractive yields. I'll make sense from a diversification perspective. And we've done that to a significant degree. The size depends on the underlying strategy, a preference for resilient, high-quality assets, even though they may have a bit more spread volatility than some of the more economically sensitive areas, particularly those less liquid areas of the market.

We do believe that it makes sense to give up a little bit of yield to pick up resiliency. The great news is when you look at things like agency mortgages, Treasury inflation protected bonds, Triple-A senior structured product risk backed by the consumer, consumers are in the best shape they've been in, gosh, a decade plus since the crisis. All these areas are areas where it's going to be about spread widening and ideally in the coming few weeks spread tightening. It's not about downgrade risk. It's not about default risk. So we continue to focus on those areas. On weakness, we continue to add to those areas. And that's again a key theme we've talked about for quite some time.

Then thirdly, it's quite stressful for some but exciting from a macro perspective. The last couple of years we've been successful in relative value trading, looking for overshoot, structural inefficiencies in markets. We've been more active than we've typically been during these periods within the broad opportunity set. We had an example just a few weeks ago in Germany where people normally would say, wow, you invest in bunds, German government bonds, you give up yield, but you pick up stability and low volatility. Well, we found out again Germany pivoted quite significantly in terms of the intention to spend more on the fiscal side. You saw meaningful underperformance in a market that normally would be considered quite safe and uninteresting.

So there's a lot of work beneath the surface trying to leverage the full teams that we have at our disposal to do a lot of relative value trading of a more liquid variety to take advantage of dislocation. And there will likely be more micro dislocation in a more targeted, rich setting. Not super exciting on a call like this to go through. But a lot of looking to hit singles, using a baseball analogy, my apologies for being a bit too US centric, but the idea of a lot of small expressions that add up to attractive returns versus passive alternatives. But I think the one area I can't emphasize enough is that this is an environment where if we continue to see this type of policy or ratcheting up of rhetoric or actual policy decisions around tariffs and other sources of global friction. We're going into a recession, and it very well will be that stagflationary type recession, which somewhat ties the hands of the Federal Reserve and other policymakers.

So, again, the area where investors need to be the most cautious is this very economically sensitive, lower quality credit. It's not going to feel that way. But literally hear these stories that, well, you should be hunkering down and things that aren't mark to market but represent single B type credit risk to mid-market companies. When on the other side we're hearing about managers, owners of CEOs of mid-market companies or smaller businesses really, really concerned over the near term. And the last point is not opining on policy here. I may come across as being more critical.

I think the point here is that there are thoughtful, long term policy goals. There's arguably the need to reset trade, to balance trade, to balance global financial and geopolitical relationships. It's just a question of from a market's perspective. Is it too much too soon? Is the implementation such that markets are lacking clarity? We expect to get more clarity in the coming weeks, but that's the risk. And again, if we don't get that clarity, if people really begin to romance a downgrade or a default cycle, you very well may get the good old-fashioned flight to quality dynamic. Maybe not like you did in the past, but you could see those attractive, higher quality bonds on a global basis that have been volatile. Again, many of them just back to levels that we saw a couple of months ago, but they very well could rally over the course of the coming months. So lots of uncertainty, lots of volatility. But optimism, at least in the higher quality areas and the likely opportunity to be more creative within the deep credit allocation or the equity allocation at some point down the road.

Esteban Burbano: Yeah. And you've hinted along your answer on this, but I want to perhaps spend a little bit more time on some of the questions that we're getting. Is high yield spreads are very wide, not very wide, but they've widened significantly, perhaps to a level that is more sort of normal, but still perhaps not cheap enough. How are you thinking about the credit markets, you hinted heading into the heading into the higher quality segments? But any other things that you're watching on the credit markets?

Dan Ivascyn: Yeah. Well, the top-down area, again, just to reemphasize this point is to understand the willingness to calibrate policy. If you do get negotiated settlements with key trading partners and limit the near-term impact on the economy and on credit fundamentals, you could see a step back in spreads from here, both high yield and investment grade. But both markets are not trading nearly as wide as the recessionary risk embedded in markets. So high yield now, gosh, I've been at the desk here for what, 15 minutes. They could be almost anywhere. But in the high four hundreds would suggest still a below 50% recessionary type risk. Not too different assumptions in the investment grade market. So we still think there's a little bit of complacency there.

The great news for investors is you don't have to take a lot of risk in the lower quality, high yield markets. And it's even more exciting today to be able to take advantage of higher quality assets that have repriced and are looking more attractive, even though their fundamental risks haven't really gone up, other than there's been some selling more recently. So all the things we've been talking about for several quarters continues to mostly hold. Credit spreads are becoming, gradually becoming more attractive. But the economic situation is more uncertain as well. So we stand poised to add in some strategies where we've been extremely underweight that type of risk we've added around the edges. But we're going to stand back and wait a bit more. We certainly have the opportunity when we do see more cash selling in that market, if we do, to be able to fine tune and it will likely be a really, really good trading opportunity.

I mentioned consumer asset backed risk, again, very well insulated from loss. We've had a big rally in home prices. We've had a massive regulatory response since the GFC. Loan to value ratios across pools of mortgage assets very low, below 50%. These cohort groups that may own a home but can't extract equity are very good borrowers to provide an automobile loan or cosign student loan to, so that those continue to represent overweights across PIMCO portfolios, both public and private. An area, again, almost regardless of the economic shock should, at least from a loss perspective, be incredibly resilient. They'll widen and spread and to a degree with other assets, but very, very attractive. Emerging markets, a lot of opportunities there.

You very well over the next five to ten years given this dynamic where, as I mentioned earlier, the United States takes a more aggressive stance towards China, but is willing to negotiate with other trading partners across Southeast Asia or other potential beneficiaries across South America. As an example, this very well could be an attractive long-term period for emerging market performance. Valuations started at both fixed income and equities, much more attractive than many of the developed markets, so we like that sector. We just think in a highly uncertain environment in a lot of our broad mandates, including some of the mandates that I focus on day to day, we're just being a bit more cautious in that space.

And then last but not least, the private markets, nearly all of our asset allocation themes that I talked to you about, have talked to you about just now impacting our thought process for asset allocation in the public strategies hold true. The one piece I think that's very, very important to mention is that there's a practical limit to how wide public credit spreads can get before you're going to get a response within the legacy stock of private lending as well. So I think that's an area that investors want to watch very, very carefully. There tends to be a lag response given market structure in that space, but that very well may be theme for a few months from now.

Right now, we're going to deal with a lot more macro volatility as people reposition in response to the global trading geopolitical environment in this administration's priorities, including tax, which again, is right around the corner, you can fixate on tariffs because that's what's in front of us today. But there's certainly going to be more policy that gets introduced that's positive from a growth and maybe even a productivity perspective. But we expect volatility to continue, which is both an opportunity for investors. But you also have to think in a diversified fashion and leverage a global opportunity set.

Esteban Burbano: Yeah. Can I touch very quickly on - we obviously have an overweight to mortgages, agency mortgages. Touched on this already, but just to one of the areas of concern. Is policy changing there as well? Can you just rephrase? Because obviously, mortgages have widened, but they're still pretty resilient versus other types of corporate credit. But just your thoughts, your latest thoughts of what's going on in that space. How are you thinking about this space going forward given our overweight to mortgages?

Dan Ivascyn: Yeah. So we think agencies have the benefit of a direct government guarantee or strong guarantee of an agency of the federal government. They're very well held by financial institutions in the US. A key priority of this administration, and there's been no friction or uncertainty here, is stabilizing the banks, giving the banks more flexibility to lend more aggressively. I think that was even brought up in news flow today from Treasury Secretary Bessent. So we believe that yes, there's a chance that at some point in the future, the agencies or this administration looks at privatizing the agencies, but agency mortgage spreads even after the recent corporate widening, look very attractive versus other forms of corporate credit risk.

You had this very, very unique situation where over the course of the last couple of years, agency mortgage spreads were actually wider than investment grade corporate spreads. So we think a lot of that is priced into the market until interest rate volatility picked up more recently. Agency mortgages were doing very, very well this year. So we think the base case is still that the agencies are likely to remain a part of the US government. There's been talk of them even being placed in a sovereign wealth fund. They're quite profitable for the federal government. So I know we're trying to get deficits down. And, sure, you can make the agencies more efficient like you can in other areas of government. So we think that if they were to be privatized, they would be done in a way that maintains the very high quality for agency mortgage-backed securities.

As I mentioned earlier, even the non-government guaranteed stuff has very, very low leverage. The agency balance sheet is near pristine as well. So we continue to like the space. And the most important point is that regardless of the path for the agencies themselves, this is high-quality risk in a world of extreme economic uncertainty. So yes, we could widen during these periods versus a Treasury bond. But again, it's spread widening. It's not the risk of meaningful downgrades or other material drawdowns. So we continue to like this sector. It's going to continue to be volatile as rates settle down. You very well will see agency mortgages perform well from here. Again, the market settling down can be influenced by one individual or one administration's clarity over the coming days.

Then even if you were to get an extreme outcome for markets around market functioning, I think it's also important to note that the Federal Reserve is quite used to supporting the Treasury market, the agency mortgage market, if you ever need assistance in the future again, and we never want to buy something relying on assistance. But there's a high probability, based on past history and statements from policymakers, that you do get support. People want mortgage rates to remain well bounded. They want these markets to see volatility come down. So although we don't want to rely on support from policymakers, there very well could be a direct form of support if you were to see a deterioration in volatility and therefore a pretty quick snapback in valuations. So again, a nice feature to have in this market set up. But these assets stand on their own. They're very attractive and very defensive. And again, in a world with increasing uncertainty.

Esteban Burbano: Great. One last question for you, Dan. And being conscious that we're going to have global clients listening to this, views on the dollar, views on currencies. How are you thinking about this. Not something that we have a lot of in our portfolios, but something that is obviously very important from a perspective of like the global investor. How are you thinking about that?

Dan Ivascyn: Sure. We, over the maybe even the short term, but over time, a lot of these policies very well could lead to some further dollar weakness. The dollar as a global reserve currency and based on this idea of US exceptionalism, which has been at least partially eroded over the course of the last couple of months, the dollar has seen a lot of positive demand. You see it in terms of interest in our equity markets. We still have all these companies focusing on innovative technologies. And to the degree that this is even ever so slightly or partially reversed given starting valuation levels, we can see, as we've seen over the course of the last few months, some dollar weakness. So we have a little bit of underweight to the dollar across most strategies. You got to be very, very respectful of the fact that you could have very, very significant retrenchment in these currency markets.

So a small dollar underway thus far becoming a bit more favorable to a more significant underweight to the dollar. I think the key point, rather than dollar directionality, is back to this idea that currencies are moving all around the globe, and that's creating a lot of opportunity to take better behaved exposure defined as things that are better bounded within the currency space. So it's a very exciting opportunity within the relative value areas of currency trading. But just a slight underweight to the dollar. Nothing extreme. We think the dollar is going to, you know be volatile just like rates, just like credit, just like equities. But don't expect major problems there, but do think that over the course of the next five years or so, it's likely poised to weaken a bit.

Esteban Burbano: Great. Well, this has been a great update. Dan, any final words to our clients?

Dan Ivascyn: Well, I thank the clients. Always appreciate you taking the time. We value your relationship. Scratched the surface today at a very high level, so I want to make sure that we're communicating well. Of course, very focused on risk adjusted returns. I think it's important to step back and realize that within a lot of noise in these types of market environments, there's a lot of return generation to have as well, and these markets will be subject to pretty significant reversals. But we do want to talk to you in detail about your respective mandates at the firm. But again, as always, thank you for your confidence in the firm. We wouldn't be here without you. So thanks again. And look forward to keeping the communication channels open. Important time for that.

Esteban Burbano: A lot going on as well. Thank you, Dan, and thank you all for joining us today. We hope that you found this update timely and helpful. For additional resources, please reach out to your PIMCO partner or check PIMCO.com. Thank you.