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The ‘bend but don’t break’ way to navigate volatility

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This is a sponsored article from PIMCO.

How has the PIMCO Income Strategy managed to weather market stresses and deliver consistent income for over a decade? Read on to find out.

Persistently high inflation, hawkish central banks, unfolding banking sector challenges, and a potential recession on the horizon – there is no shortage of uncertainty today to rattle markets and investors.

At PIMCO, we view this volatility as fertile ground for active managers with a broad, flexible opportunity set. Our flagship Income Strategy’s ’bend but don’t break’ approach navigates these macro dynamics in its pursuit of resilient income, and seeks to turn volatility into opportunity.

With bond markets offering the highest yields, spreads, and total return potential in years, we have positioned our Income portfolio to benefit from not only the favourable environment, but also market volatility and a weakening economy.

Flexing through fickle markets

“With ’bend but don’t break’, we focus on positions where some price fluctuations in volatile markets are possible, but a long-term permanent impairment of capital is unlikely,” explains Alfred Murata, who oversees the Income Strategy alongside fellow portfolio managers Josh Anderson and Dan Ivascyn.

This means targeting bonds with robust asset coverage and seniority in the capital structure, as well as focusing on more liquid segments of the market with attractive yields which, we believe, should provide resilience in a recession. Liquidity would also allow us to take advantage of the valuation overshoots that we expect to see across markets in the coming months.

Opportunities with potential resilience

An example of a sub-sector we find attractive would be US agency mortgage-backed securities (MBS). The asset class is historically liquid and offers an implicit government guarantee, which should provide resilience across a range of economic scenarios. Spreads are back at attractive levels last seen during the 2020 COVID-19 crisis.

We equally favour non-agency MBS, which are bonds that are backed by residential loans but not guaranteed by the government. We emphasise senior secured legacy mortgages that we believe are more insulated from a possible housing downturn, due to a home equity cushion that has been building-up over the past decade, with many loans now having a loan-to-value ratio below 50%.

Within corporate credit, we remain cautious given significant volatility in credit spreads, but see pockets of opportunities. We favour healthcare and telecom because spreads have widened significantly since the end of 2021 and because we don’t think these two sectors will be particularly negatively affected by elevated macroeconomic uncertainty.

Adding value with active management

The benefits of active management have shone through again in this past year, with the Income Strategy outperforming many higher-risk credit assets in the market.

PIMCO’s investment process, which combines top-down macro views from our Cyclical and Secular forums with bottom-up insights from our investment team, has played a central role by helping to calibrate the Strategy’s ’bend but don’t break’ approach. With portfolio managers and trading desks around the world, we have the scale and ability to uncover opportunities across the entire opportunity set of the roughly US$128 trillion* global fixed income universe.

Looking ahead, if yields reach a peak and spreads tighten again, we think there could be total return upside potential for PIMCO’s Income Strategy.

“With the volatility, a lot of companies and countries will need financing. Different unique structures are going to be developed,” says co-portfolio manager Anderson. “And I think there will be many ways to add incremental value.”

So, for those who’ve been sitting on the sidelines of the bond market, we see a strong case for getting back in.

*Global bond market size as of 31 March 2022.


Past performance is not a guarantee or a reliable indicator of future results.

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.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

A word about 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. 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. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. 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.

This material contains the current opinions of the firm and such opinions are subject to change without notice. This material is 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.

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This is a sponsored article from PIMCO.

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