A widening spread between long- and short-term U.S. bond yields makes longer duration assets more attractive for investors as a recession looms in an uncertain macroeconomic environment, a portfolio manager at bond giant PIMCO said on Thursday.
“Starting yields are high, relative to history and other asset classes, on a risk-adjusted basis,” said Stephen Chang, who manages about $2.8 billion in Asia-focussed fixed income funds at PIMCO, among others.
“This can create a ‘yield cushion’ amid a still highly uncertain outlook,” he told the Reuters Global Markets Forum (GMF), providing investors an opportunity to build resilient portfolios with robust yields and moderate risk.
Pacific Investment Management Co. (PIMCO) had $1.74 trillion of total assets under management at the end of September 2023.
Chang said markets were priced for an “immaculate disinflation” scenario, in which growth remains solid and core inflation drifts lower towards central bank targets swiftly.
That pricing “may reflect complacency”, he said, adding that while the market sees a soft landing as a probable scenario, PIMCO is more inclined to expect weaker growth ahead.
The recent rise in yields is a reflection of the Federal Reserve’s expected reaction to relatively stubborn core services inflation, Chang said, after a stunningly strong jobs report bolstered the case for more tightening by the central bank.
“I would highlight that higher rates, including the 30-year mortgage, will tighten financial conditions, and may lead to the Fed having to do less,” he said.
Chang said PIMCO’s strategies would look to favour U.S. agency mortgage-backed securities (MBS), given their high quality, government backing, robust liquidity, and attractive valuation.
He said PIMCO also broadly favoured securitized investments and structured credit within fixed income.
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