With proper positioning, today’s bond market may offer the potential for equity-like returns with less risk. PIMCO Fixed Income Strategist Gordon Harding explains how the PIMCO GIS Income strategy is positioned to seek higher yields and the potential for price appreciation that fixed income is now offering, while striving to remain resilient in the face of economic uncertainty.
What is your macro outlook and what are the implications for bonds?
We believe core inflation will trend lower but linger above central bank targets for several quarters in the U.S., UK, Europe, and some other developed economies. But this path to central bank targets may be bumpy and could include a slight reacceleration in core inflation over the next few months. Also, monetary policy takes time to filter through the economy, which raises the risk of a recession when the full impact of the sharpest tightening cycle in decades is felt. We expect volatility across the globe to continue into 2024, providing fertile ground for active managers. As a result we've shifted into higher-quality assets that can offer compelling yields and improved liquidity. These assets could provide resilience, flexibility and price appreciation should we slide into a recession.
How are you positioning the Income Strategy when it comes to corporate credit in particular?
When spreads on corporate credit in particular spiked earlier this year after the collapse of three regional US banks, we tactically added high quality credit exposure. Now that we're in the midst of a credit and equity market rally - with valuations that don't appear to incorporate the possibility of a hard landing - we've started to reduce our exposure. We are a little more neutral on investment grade corporate credit and in the high yield segment, we have been more tactical, focusing on higher-quality issues. Our flexibility has already enabled us to take advantage of market dislocations in high quality assets that have been caused by fear or sudden shifts in economic expectations.
Looking at interest rate risk, how are you positioning the Income Strategy along the yield curve and across different countries?
As shorter-term yields have risen, we've increased our interest rate exposure, particularly in the front and intermediate portion of the curve. The inverted yield curve, where short-term rates are higher than long-term rates, enables us to seek attractive income without taking significant interest rate risk further out the curve. If yields were to rise meaningfully from here, we may increase our interest rate exposure further.
Investors today have multiple options, including sitting in cash. Why should they consider bonds?
We recognise cash currently provides attractive levels of yield, but cash may only allow you to lock in that rate overnight. Longer-maturity fixed income assets have the ability to lock in an attractive yield for longer and offer the potential for price appreciation, particularly if the economy weakens and central banks begin easing. Multi-sector strategies, like the Income Strategy, have the flexibility to invest across a range of sectors, geographies, credit qualities, and maturities.
Share value can go up as well as down and any capital invested in the Fund may be at risk. The Fund may use derivatives for hedging or as part of its investment strategy which may involve certain costs and risks. For more details on the fund's potential risks, please read the Key Investor Information Document/Key Information Document
Disclaimer:
Marketing Communication
This is a marketing communication. This is not a contractually binding document and its issuance is not mandated under any law or regulation of the European Union or the United Kingdom. This marketing communication does not include sufficient detail to enable the recipient to make an informed investment decision. Please refer to the Prospectus of the UCITS and to the KIID/KID before making any final investment decisions.
For professional use only
The services and products described in this communication are only available to professional clients as defined in the MiFiD II Directive 2014/65/EU Annex II Handbook and its implementation of local rules and as defined in the Financial Conduct Authority's Handbook. This communication is not a public offer and individual investors should not rely on this document. Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness.
Additional Information/Documentation
A Prospectus is available for PIMCO Funds and UCITS Key Investor Information Documents (KIIDs) (for UK investors) and Packaged retail and insurance-based investment products (PRIIPS) key information document (KIDs) are available for each share class of each the sub-funds of the Company.
The Company's Prospectus can be obtained from www.fundinfo.com and is available in English, French, German, Italian, Portuguese and Spanish.
The KIIDs and KIDs can be obtained from www.fundinfo.com and are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the UCITS Directive).
In addition, a summary of investor rights is available from http://www.pimco.com .The summary is available in English.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. PIMCO Global Advisors (Ireland) Limited can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive."
RISK
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Derivatives may involve certain costs and risks, such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. High yield, lower-rated securities involve greater risk than higher rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. Swaps are a type of derivative; swaps are increasingly subject to central clearing and exchange-trading. Swaps that are not centrally cleared and exchange-traded may be less liquid than exchange-traded instruments. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Certain U.S. government securities are backed by the full faith of the government. Obligations of U.S. government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value.
Past performance does not predict future returns
This email contains the current opinions of the manager and such opinions are subject to change without notice. This presentation has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this presentation may be reproduced in any form, or referred to in any other publication, without express written permission.
PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser.
