Text on screen: PIMCO

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Text on screen: Ken Chambers, Product Strategist

Chambers: What are you and the investment committee discussing with this period of heightened volatility?

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

Ivascyn: Sure, Ken. I think the most important point is that scenario analysis is critical. Not just focusing on base case views, but really focusing on more extreme scenarios, tails are fat today in terms of the distribution of possible outcomes and we're trying to have a healthy degree of humility for the fact that our base case views may be wrong. But the good news is we can put together portfolios that are resilient under different states of the world. And that really has been the focus. Good news though, after going through a period of such extreme volatility where nearly every financial market asset has gone down this year, valuation has returned to markets, particularly fixed income.

When we look at the fixed income market opportunity set today, it's looking quite attractive both from an absolute perspective or versus cash for investors that may have been on the sidelines looking to avoid the volatility, or even coming from more risky positions within the equity markets where we are cautious on valuations and where we do think there could be a bit more downside within the equity universe specifically. So, with volatility, with a lot of trending markets in the wrong direction from an investor perspective comes opportunity and we're finally at a point where we do see considerable opportunities for the patient fixed income investor.

Chambers: On the back of that, can you talk about the attractive value proposition for bonds today?

Ivascyn: So when thinking about bond valuations, I think you have to think about a world with stickier higher sustained inflation on a go forward basis. So, I guess that's the bad news. Good news is a lot of this is priced into bond markets at the moment.

FULL PAGE GRAPHIC: TITLE – Valuations: Bond value returns. The bar chart shows Yield to Worst (%) for Core Bonds, Agency Mortgage Backed Securities (MBS), Investment Grade Credit, High Yield Credit, Emerging Markets, Munis, and High Yield Munis. As of September 30, 2022, the yields for all the bond sectors shown were significantly higher compared to their yields on December 31, 2021. The top three sectors with the highest yields as of Sept. 30 were High Yield Munis, High Yield Credit, and Emerging Markets.

So, the bottom line is that valuations have changed a lot very, very quickly. Financial condition tightening typically means better value for end investors within the debt markets, and it's finally arrived.

Today as a starting point looking forward is very, very different. When you're earning a 5% type annual yield, 6, 7, 8, 9%, that's a powerful source of return.

We're much more excited this quarter than the last several quarters where it felt like defense should be the focus, I think today careful investors could go on the offense and achieve pretty attractive value.

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Disclosure

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, call risk, 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. Income from municipal bonds is exempt from U.S. federal income tax and may be subject to state and local taxes and at times the alternative minimum tax. 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. 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. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Diversification does not ensure against loss.

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