David Fisher, Head of Traditional Product Strategies: Hello. I’m David Fisher, and I’m here again today with PIMCO’s group CIO Dan Ivascyn to talk about some of the recent discussions taking place in PIMCO’s investment committee, or IC. Since we last spoke, we’ve seen a pretty dramatic drop in US Bond Yields, and globally, we’re at a point where about 30 percent of the Investment Grade bond universe is now trading at negative yield. There’s actually been, even, some talk about US rates going negative in the case of a recession. But how is this influencing conversations in the IC? How is it affecting our view of where the investment opportunities are?
Dan Ivascyn, Group Chief Investment Officer: Sure. Within the investment committee, we’ve been spending a lot of time talking about the themes or the drivers of yields going lower. And what we’ve noticed, since late last year, is a pretty significant slowing in global growth, driven primarily by the manufacturing sectors, but pretty coordinated or consistent slowing across the various economies that we track. That, combined with significant political uncertainty, primarily focused on trade, has certainly contributed to a lot of momentum in the higher-quality fixed income markets over the course of the last several weeks, and the investment committee’s spending a lot of time talking about not only what has occurred, but the likely outlook for growth going forward as well as the likely path regarding these ongoing trade negotiations as well.
In terms of the outlook going forward, we continue to be overweight U.S. rates. When you look at interest rates in the United States, you have some of the highest nominal yields across the developed world, and this is one of the few markets that has room to rally more significantly if economic growth were to deteriorate further, or the trade situation were to deteriorate as well, which we think would ultimately flow into global growth.
However, we acknowledge, when we look at US rates today, after the rally that we’ve seen there’s no longer a lot of value there. Looking at our own inflation expectations in yields adjusted for inflation here in the United States now, real rates, or these inflation adjusted rates, are zero in many cases, even outright negative. In much of the rest of the developed world, outright rates are negative.
Although, with that said, there’s a lot of momentum in these markets, there’s a lot of fear out there in these markets. So, these yields, although getting expensive under more traditional metrics, certainly could get more expensive over the course of the next several weeks, especially if we see continued economic weakness.
David: So one of the areas that you've talked about opportunities is in emerging markets. Clearly, interest rates are a bit higher in many emerging markets than they are in the developed world. What’s the IC's current view on whether there are still good opportunities within EM?
Dan: So I’d categorize our current view on EM as cautiously optimistic. The emerging markets have been volatile of late.
Shots of a port filled with shipping containers and cargo ships
Emerging markets will be very sensitive to further deterioration in trade negotiations, or an uptick in trade wars globally would not be friendly events for emerging markets.
When we think in the context of a global and a diversified portfolio, there’s still going to be select opportunities in emerging markets.
Shots of cities from countries with emerging markets
As long as you stay diversified, and you look at them in the higher risk bucket of the particular portfolio that you're focusing on.
David: So a selective approach to taking risk in emerging markets. Where else is the IC finding opportunities? Where are the highest-conviction ideas globally?
Dan: Conceptually, what we’re looking to do is find attractive spread. We’re looking for ways to pick up incremental return in some of the higher-quality, more defensive segments of markets, two areas that I’ll note that have lagged in terms of performance over the course of the last several weeks.
One, agency mortgage-backed securities. This is a sector of the market where you benefit from a direct US government guarantee, or at least a guarantee from two major agencies of the federal government, and where you’re in a high quality and a liquid asset that provides attractive returns versus other high quality corporate alternatives as an example.
We also like select inflation-protected bond markets. Although our base case is for inflation to remain relatively low, when you look at the break-even inflation rates currently embedded in the pricing of these instruments, these securities increasingly offer value as well.
David: So one last question, given the volatility in markets and all of the headlines, has this changed the way the IC approaches investing?
Dan: It really hasn’t, David. We — for many, many years at PIMCO, try to take a longer-term approach into constructing portfolios. What we try to really do is get together, think sufficiently long-term in nature, think about the world with a few key top-down constructs when making decisions, and most importantly, be patient.
You will not catch every rally. You'll make some good local decisions, some poor decisions from time to time. But we always feel it’s important to stick to a longer-term game plan. You also need to be respectful of the pretty significant uncertainty that we operate in as market participants today.
Shots from a PIMCO secular forum
I know our secular forums, where we get together once a year to talk about themes impacting markets for three to five years, or even longer, have talked about these rude awakenings, or these types of disruptions that we’ll need to get used to.
So we can’t be complacent, from a risk management perspective. What we’re really trying to do is protect downside as primarily fixed-income investors, be very, very prudent in portfolio structure, be good liquidity managers. And if we do this well, with a long-term focus, we can react and add value during these bouts of market illiquidity. And it’s that same structure, that same philosophy, that’s worked pretty well over the long run, on behalf of investors, and we’re still sticking to that general approach.
David: Great. Well, thanks for your time today, Dan, and thanks to you all for joining us.
For more insights and information visit pimco.com
Past performance is not a guarantee or a reliable indicator of future results.
All investments contain risk and may lose value. 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. 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. 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. 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. 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. 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.
There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority's Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963), PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Spanish Branch and Swedish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act, the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008 and the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia). This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (107) FSC SICE Reg. No.001. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.), Tel: +886 (02) 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2019, PIMCO.