Central banks have stepped up as lenders of last resort not only for banks but increasingly also for other financial intermediaries and even for nonfinancial corporations through a range of lending and asset purchase programs (for details on the U.S. Federal Reserve’s response, see PIMCO’s blog post, "The Fed: Avoiding a Depression"). Moreover, through near-zero or negative interest rates (see Figure 2) and large-scale purchases of government bonds, central banks also provide a much-needed backstop for fiscal policy.
Still prefer U.S. over global duration
We believe a focus on U.S. duration over other global markets has been the right approach over recent weeks and, inspite of the significant relative outperformance of U.S. duration, we see room for U.S. rates to move further in theevent that economic and market stabilization takes longer than our baseline outlook. There is of course thepossibility of global yields moving somewhat higher as crisis management measures take hold and investors lookacross the economic valley ahead to the eventual recovery. While maintaining a preference for U.S. duration, we donot anticipate taking large positions and generally expect to stay fairly close to neutral in overall durationpositioning across our portfolios.
Attractive dislocated high quality assets
U.S. agency mortgage-backed securities (MBS) and U.S. Treasury Inflation-Protected Securities (TIPS) are high qualityassets that have been negatively affected during extreme market conditions. Agency MBS have recovered significantly,in part owing to the Fed’s actions, and TIPS should also recover as liquidity conditions normalize withcontinuing Fed purchases and as longer-term inflation expectations pick up.
U.S. non-agency MBS, U.K. residential MBS and many other asset-backed securities (ABS) have been negatively affectedduring the period of market dislocation. We see these as resilient assets, with diversified pools of borrowers, andgenerally low leverage and loan-to-value ratios. We will look for attractive opportunities to acquire defensiveassets when they present themselves.
While we have for some time taken a cautious approach on corporate credit, in part owing to concerns about valuationand market functioning, we now see some good opportunities to add longer-dated exposures in high quality issuerswhere we believe we will be well-compensated for the risk. We plan to take a patient approach but will look toredeploy capital into attractive credit opportunities in the highest-quality segments of the investment gradecorporate bond, ABS, and commercial MBS markets, including new issues. In private credit approaches, similarly, weanticipate good opportunities to deploy capital and to seek attractive liquidity premiums. Meanwhile, we remaincautious on the weaker segments of the investment grade, high yield, and loan markets.
ECB action critical for euro area spreads
We will generally take a cautious approach on exposure to European sovereign risk and watch closely the ECB’sactions and, over time, the potential for more coordinated fiscal policy actions to build a more resilient euroarea. In the short term, peripheral euro area spreads should be well-supported by the ECB, and central bankpurchases could potentially push spreads significantly tighter if the ECB is prepared to take on this role at a timeof increased pressure on fiscal balance sheets. We will watch closely for evidence. The ECB’s actions willspeak louder than its words.
Cautious approach in emerging markets
Emerging markets are heading into this recession with few major macro imbalances, which should leave sovereignbalance sheets more robust to a severe, but fairly contained, growth shock. It will be harder for emerging marketcentral banks and fiscal authorities to do the large-scale backstops that are being deployed in developed countries.This, together with a persistent negative shock to oil prices, mandates a cautious approach in emerging markets, inour view. But dislocations should lead to good opportunities for active managers and we expect to find selectopportunities that offer attractive risk/reward balance in positioning for global market healing.
For our forecasts for growth around the world, view our regional outlooks.
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Disclosures
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. 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. 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. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. 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. 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. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.
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.
Duration is the measure of a bond's price sensitivity to interest rates and is expressed in years.
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 material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes. Forecasts, estimates and certain information contained herein are based upon proprietary research 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 material 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. THE NEW NEUTRAL is a trademark of Pacific Investment Management Company LLC in the United States and throughout the world. ©2023, PIMCO.
