You are now leaving the PIMCO website.

Skip to Main Content
Economic and Market Commentary

Seizing Opportunities as Valuations Improve

Market volatility has lifted bond yields, which can create better long-term investment opportunities and generate higher income. Group CIO Dan Ivascyn discusses how investors can add exposure to areas that have become more attractive.

Text on screen: PIMCO

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

Text on screen: Kimberley Stafford, Global Head of Product Strategy

Stafford: Hello, I’m Kim Stafford, and I’m here again with PIMCO group CIO Dan Ivascyn to give you an inside look at some of the recent discussions taking place within PIMCO’s investment committee, or IC. Thank you for joining us, Dan.

Ivascyn: Thanks, Kim.

Stafford: It’s been a brutal few months for stocks and bonds alike, as markets have been confronted with risks posed by inflation, tightening monetary policy, and the war in Ukraine. Can you walk us through what’s happening and how markets have reacted?

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

Ivascyn: Sure, so you’re exactly right. It’s been an incredibly volatile period for markets. We anticipated significant volatility this year based on the global economic reopening process as well as this uncertainty around inflation. And now you’ve added the situation on the ground in Europe with actual war in Ukraine.

So this is a world where there are tremendous amounts of cross-currents that need to be analyzed. That’s leading to a lot of uncertainty, even a little bit fear in certain pockets of the market.

Stafford: So given everything you just outlined, how should investors be looking at the current market environment and in particular bonds?

Ivascyn: Sure, so just to start on bond valuations, we’ve had a significant selloff. And as we approach yields in this country, the United States, of around 3% now, you’re beginning to see levels that represent at least reasonable long term value.

Text on screen: We anticipate inflation will come down over the course of the next couple of years

Images on screen: Gas and grocery prices

If, as we anticipate, inflation comes down, it will remain frustratingly high, but comes down over the course of the next couple years.

So for the first time in a long time, bonds are beginning to look reasonably attractive from a longer term perspective.

Text on screen: Bonds may offer investors better long-term value

So the bottom line is better value for end investors within fixed income over the intermediate to long term in the midst of tremendous uncertainty over the short term. So we at PIMCO would encourage other investors that have been underweight or avoiding bonds to begin to look at increasing the overall allocation.

So with volatility comes opportunity. Doesn’t feel great for investors participating in these markets, but we’re seeing a much more target rich environment to use and leverage the full team here at PIMCO to extract value through more of a relative value trading mindset.

Stafford: So Dan, given all the volatility in the market, where are you starting to see value today?

Ivascyn: Well, first of all, we think it’s critical that investors take a value oriented approach in the current market environment. You need to be patient and focus on longer term value.

And in fact, there are sectors of the market based on the recent selloff we’ve seen across most areas of the financial market opportunity set that are beginning to look attractive. You’ll never time things perfectly, and you very well may be adding risk that continues to widen in spread over the short term.

But the key is that relative to the last several years, we haven’t seen these types of valuations for quite some time.

We’ve seen some key segments of the market widen in spread to the point where valuations are beginning to look quite attractive, and that’s what we’re really trying to do, is to step back and look at areas of the market that have widened in a world of fairly extreme uncertainty that represent good intermediate to long term value for the end client.

Text on screen: TITLE – Where we’re finding value today: BULLETS – Agency mortgage-backed securities, Financial sector, COVID-19 recovery themes, Collateralized investments

One example, agency mortgage backed securities. These are investments that were heavily purchased by central banks, the Federal Reserve.

Now they’ve expressed an intent to reduce balance sheet in these instruments that benefit from a direct government guarantee or a strong agency of the government guarantee have widened out to levels that look quite attractive from a historical perspective.

This is a sector that’s very high quality, very liquid, represents good value in an area where we’ve begun to return in more significant size as we see much more attractive absolute and relative valuations.

The financial sector is a sector that we continue to like. Certainly in a world where recession risk is higher than it was previously, banks going to suffer from a spread perspective. But these institutions since the global financial crisis are incredibly well capitalized.

Based on post crisis regulation, they’re taking very few risks as platforms, at least from a longer term historical perspective. And based on recent spread widening valuations are beginning to look quite attractive as well.

There are a whole slew of COVID related recovery themes that we think are still attractive today. Although recessionary risk is elevated, there are sectors and segments of the market that are going to directly benefit from this very powerful reopening process we’re seeing in the U.S. and Europe and some other key regions of the world.

The lodging, hospitality sector, airline sector, where you get access to secured exposure all make sense to us from a relative value perspective as well.

Collateralized investments, whether you’re talking about asset backed risk, commercial mortgage backed, or even residential mortgage risk of a more seasoned variety also look quite attractive.

These are instruments that have benefitted significantly from the big rise in asset values that we’ve seen over the last several years. These are sectors of the market that tend to be resilient during more reflationary type periods like we’re in today.

Stafford: So in investment committee today, how are we sizing recession risk?

Text on screen: We see recession risk over the next 12-18 months to be as high as 30%

Images on screen: Stock ticker

Ivascyn: So we see recession risk over the next 12 to 18 months to be as high as about 30%. We have several different types of models that approaches recession probabilities from different perspectives, but that’s our general thinking.

One of the key reasons for that is the Fed and other central banks appear dead set on getting inflation under control. They’re at least talking in that manner. The choices will become more difficult over time as people begin to see the tradeoffs between growth and inflation, but we do believe they’re serious and really looking to get in front of this inflation problem.

But the tails of the distribution have certainly gone up. War in Europe is a very unique, challenging situation, far from being under control.

Images on screen: Shanghai and COVID-related images

But then you see even out in Asia, Covid still is having significant effects on the global economy as well.

So again, we think it’s a time where investors should begin to look at some interesting areas of the spread sectors but stay in the higher quality end of the overall risk spectrum.

Stafford: Now on the topic of inflation risk, you mentioned the Fed will be front footed. What can we expect in terms of their inflation response?

Ivascyn: Yeah, we think they’re going to be very aggressive in both words and initial actions.

Images on screen: The Federal Reserve building

They’ll continue to be very focused on the data, though even if they begin to see some key components of core inflation trend lower, to the extent these absolute levels remain well outside their target, we think they’re inclined to go fairly forcefully over the course of the next few meetings.

And in an environment like that one, not only can you expect a volatility within the fixed income markets but as rates go higher, particularly real rates, we would expect to begin to see some downside volatility in equities, in the more sensitive areas of the credit markets as well.

Stafford: How do you view the dynamics between public and private credit?

Ivascyn: Well, we think that in this environment of relatively stretched valuations still, that having a broad opportunity set is better than a more narrow opportunity set. So wherever clients can afford to give us flexibility, we would strongly encourage looking at the full range of opportunities across the public and the private space.

Now, within the public and the private markets, there’s significant leads and lags.

Images on screen: New York Stock Exchange

So for example, when there’s a lot of volatility like we’ve seen year to date, the public markets tend to widen in spread while many of the private opportunities become much more sticky from a pricing perspective.

So at the moment, our team’s are working very closely together, looking to carefully assess value between the public and the private opportunity set. And for the time being, we’ve seen some interesting opportunities to be liquidity providers to those looking to sell public investments.

Stafford: Well, thank you very much, Dan, and thank you all too for joining us. We’ll see you next time.

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

Text on screen: PIMCO

Disclosure


IMPORTANT NOTICE

Please note that this video contains the opinions of the manager as of the date recorded, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice. The Covid-19 Crisis is ongoing and discussed for illustrative purposes only, the referenced impact may not be reflective of the current environment.

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. The strategy may invest all of its assets in high-yield, lower-rated, securities which 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. 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. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. 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. Diversification does not ensure against loss.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. 2604517) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: 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, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.| PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (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. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, Shanghai, 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other) | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (110) Jin Guan Tou Gu Xin Zi No. 020. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.). Tel: +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | 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. ©2022, PIMCO.

CMR2022-0428-2171817

Featured Participants

Tell us a little about you to help us personalize the site to your needs.

Terms and Conditions

Please read and acknowledge the following terms and conditions:
{{!-- Populated by JSON --}}
Select Your Location

Americas

Europe, Middle East & Africa