What is your macro outlook and what are the implications for bonds?
We believe core inflation will trend lower but linger above central bank targets for several quarters in the U.S., UK, Europe, and some other developed economies. But this path to central bank targets may be bumpy and could include a slight reacceleration in core inflation over the next few months. Also, monetary policy takes time to filter through the economy, which raises the risk of a recession when the full impact of the sharpest tightening cycle in decades is felt. We expect volatility across the globe to continue into 2024, providing fertile ground for active managers. As a result we've shifted into higher-quality assets that can offer compelling yields and improved liquidity. These assets could provide resilience, flexibility and price appreciation should we slide into a recession.
How are you positioning the Income Strategy when it comes to corporate credit in particular?
When spreads on corporate credit in particular spiked earlier this year after the collapse of three regional US banks, we tactically added high quality credit exposure. Now that we're in the midst of a credit and equity market rally - with valuations that don't appear to incorporate the possibility of a hard landing - we've started to reduce our exposure. We are a little more neutral on investment grade corporate credit and in the high yield segment, we have been more tactical, focusing on higher-quality issues. Our flexibility has already enabled us to take advantage of market dislocations in high quality assets that have been caused by fear or sudden shifts in economic expectations.
Looking at interest rate risk, how are you positioning the Income Strategy along the yield curve and across different countries?
As shorter-term yields have risen, we've increased our interest rate exposure, particularly in the front and intermediate portion of the curve. The inverted yield curve, where short-term rates are higher than long-term rates, enables us to seek attractive income without taking significant interest rate risk further out the curve. If yields were to rise meaningfully from here, we may increase our interest rate exposure further.
Investors today have multiple options, including sitting in cash. Why should they consider bonds?
We recognise cash currently provides attractive levels of yield, but cash may only allow you to lock in that rate overnight. Longer-maturity fixed income assets have the ability to lock in an attractive yield for longer and offer the potential for price appreciation, particularly if the economy weakens and central banks begin easing. Multi-sector strategies, like the Income Strategy, have the flexibility to invest across a range of sectors, geographies, credit qualities, and maturities.
Share value can go up as well as down and any capital invested in the Fund may be at risk. The Fund may use derivatives for hedging or as part of its investment strategy which may involve certain costs and risks. For more details on the fund's potential risks, please read the Key Investor Information Document/Key Information Document
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RISK
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. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. 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. Equities may decline in value due to both real and perceived general market, economic and industry conditions. 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. 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. 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. 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. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. Swaps are a type of derivative; swaps are increasingly subject to central clearing and exchange-trading. Swaps that are not centrally cleared and exchange-traded may be less liquid than exchange-traded instruments. 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. Certain U.S. government securities are backed by the full faith of the 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.
Past performance does not predict future returns
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PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (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.