Viewpoints

Secular Outlook 2019: Implications for Investors

What can investors expect over the next three to five years? Dan Ivascyn, Group CIO, and Joachim Fels, Global Economic Advisor, discuss economic and market conditions and what investors should consider over the secular horizon.

More from this section

Read Transcript

Tina Adatia: Hi my name is Tina Adatia, and I’m a product strategist here at PIMCO. And I’m joined by colleagues Joachim Fels, our global economic advisor, and Dan Ivascyn, our group CIO to discuss portfolio implications based on our secular outlook. Given this backdrop of lower growth, lower rates, what can investors expect in terms of returns and risk?

Dan Ivascyn: Sure. So we'll start with some, you know, some news that's not so good. The last decade, returns have been pretty strong and volatility has been relatively low.

On a go-forward basis, when we look at financial markets, whether it's equities or fixed income, commodities, we expect returns to be a lot lower and volatility to be higher. And that's a very challenging environment for all of us as investors.

So this is an environment where investors have to have a different mindset in terms of the ability to achieve their investment outcomes through riding the betas or beta returns alone, and will require a more creative approach to investing and, in that process, targeting a much wider opportunity set.

Tina Adatia: I want to talk a little bit about volatility. So Joachim, what do we expect from volatility going forward?

Joachim Fels: I think people felt like last year was a very volatile year with all that happened in financial markets. And as the chart shows, you know, this was just a return to normal historical averages. And the real aberration was really what we saw in 2017 and some of the years before.

And our view is, going forward next several years, we will see volatility rising further. And you know, we think on average it will probably be above that long-term average that we have seen in the past.

Tina Adatia: Okay. So lower returns, higher volatility going forward. So what is our view generally on interest rates, Joachim, and how do we position from an interest rate perspective?

Joachim Fels: We think rates are still pretty much anchored by the new neutral. Now, in the next recession, which we think is quite likely at some stage over the next three to five years, while it's quite likely that rates go back down to zero, we think the Fed is still unwilling to go negative. The experiment in other countries has not been that great, that successful.

And so, this is why when we move to bond yields, to the outlook for longer-term yields, we think the range, the new neutral range for ten-year yields outside of recession is probably 2% to 3%. We're now getting closer to that lower end of that range, but we're not there yet.

Tina Adatia: Now shifting to corporate credit and credit in general, Dan, what are PIMCO's views on corporate credit today?

Dan Ivascyn: This is a challenging environment. You've had issuance that's elevated from a historical perspective. You've seen a strong demand for yield, which has led to a deterioration in credit metrics, less investor protections, and spread levels from historical perspective look average at best.

So we think that this is the one sector in the market over the next five years that's prone to more material overshooting of fundamentals. So in constructing a portfolio, this is an area where we're the most cautious, where we as a firm are trying to find additional sources of yield, carry, return while sheltering our client portfolios from what we'd categorize as a lazy credit overweight or excessive exposure to that corporate data.

Tina Adatia: Shifting to another sector and another source of spread, securitized assets and mortgages. So house prices have risen, here and globally, but we've also seen that actually housing metrics have actually improved in terms of the underlying fundamentals.

We've seen delevering of homeowners, which you see in this chart here, compared to actually, corporate credit has actually relevered.

So, tell us your view on housing and securitized assets.

Dan Ivascyn: Yeah. So looking at, you know, relative opportunities, we look at the US housing market, even other global housing markets, that have faced significant regulation since the global financial crisis. And we see quite stable fundamentals. In addition to looking at bonds that explicitly have loans to homeowners backing them, but even in corporate credit sectors that are tied to the housing market, we believe are areas that should be represented in terms of overweights across portfolios.

We've seen significant deleveraging across that space. And today when you look at the type of lending that's going on in that marketplace, it's much, much more conservative today than it was pre-financial crisis. The housing market is the one area where you still see excessive conservatism, and therefore value for those lending into that sector.

Tina Adatia: Thank you Joachim and Dan, and thank you everyone for listening today. If you've got any other questions, please contact your PIMCO representative. Thank you and have a good day.

DISCLOSURE


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 suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of down turn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice

A word about risk: 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 the current low interest rate environment increases this risk. Current 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. 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. 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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. 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.

This material contains the current opinions of the manager 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.

PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963), PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Spanish Branch and Swedish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act, the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008 and the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia). This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd (Toranomon Towers Office 18F, 4-1-28, Toranomon, Minato-ku, Tokyo, Japan 105-0001) Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized. Valuations of assets will fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interest rates and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (107) FSC SICE Reg. No.001. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.), Tel: +886 (02) 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication 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. ©2019, PIMCO.

CMR2019-0610-401198

For institutional investor use only.

Filters:
Filters: Reset All

Filters

X
  • Topic/Tag

    Tags

    Reset

    Close
  • Category

    Category

    Reset

    Economic and Market Commentary
    Investment Strategies
    Bond by Bond
    Viewpoints
    Careers
    Education
    PIMCO Foundation
    View from the Investment Committee
    Close
  • Order By

    Order By

    Reset

    Alphabetical
    Most Recent
    Close
() filters applied

Multimedia Finder

Filter By:
Section
  • Economic and Market Commentary
  • Investment Strategies
  • Bond by Bond
  • Viewpoints
  • Careers
  • Understanding Investing
  • View from the Investment Committee
Experts
  • A
  • B
  • C
  • D
  • F
  • H
  • I
  • K
  • M
  • P
  • R
  • S
  • T
  • W
Clear
Tina Adatia
Fixed Income Strategist
Olivia A. Albrecht
Executive Office, ESG Business Strategy
Mike Amey
Yacov Arnopolin
Portfolio Manager, Emerging Markets
Andrew Balls
CIO Global Fixed Income
Justin Blesy
Asset Allocation Strategist
David L. Braun
Head of US Financial Institutions Portfolio Management
Erin Browne
Portfolio Manager, Multi-Asset Strategies
Libby Cantrill
Executive Office, Public Policy
Richard Clarida
Former Global Strategic Advisor, 2006-2018
Anna Dragesic
Head of Global Credit Product Strategies
Joachim Fels
Global Economic Advisor
David Fisher
Head of Traditional Product Strategies
Mary Hoppe
Daniel H. Hyman
Head of Agency MBS Portfolio Management
Daniel J. Ivascyn
Group Chief Investment Officer
Mark R. Kiesel
CIO Global Credit
Naila Makhdumi
Account Manager, Global Wealth Management
Jason Mandinach
Credit Strategist, Mortgage Strategies
Scott A. Mather
CIO U.S. Core Strategies
Lalantika Medema
Alternative Credit Strategist
Mohit Mittal
Portfolio Manager, Liability Driven Investment and Credit
James Moore
John Murray
Portfolio Manager, Commercial Real Estate
Sonali Pier
Portfolio Manager, Multi-Sector Credit
Lupin Rahman
Head of EM Sovereign Credit
Emmanuel Roman
Chief Executive Officer
Loren Sageser
Credit Strategist
Steve Sapra
Client Solutions & Analytics
Jerome M. Schneider
Head of Short-Term Portfolio Management
Marc P. Seidner
CIO Non-traditional Strategies
Sapna Shah
Head of Corporate Responsibility
Anmol Sinha
Fixed Income Strategist
Cathy Stahl
Global Head of Marketing
Christian Stracke
Global Head of Credit Research
Geraldine Sundstrom
Portfolio Manager, Asset Allocation
Richard Thaler
Distinguished Service Professor of Economics and Behavioral Science at the University of Chicago's Booth School of Business
Jessica K. Tom
Senior Credit Analyst
Tiffany Wilding
U.S. Economist
Andrew T. Wittkop
Portfolio Manager, Treasuries, Agencies, Rates
Mihir P. Worah
CIO Asset Allocation and Real Return
PIMCO
Order By
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All
Economic and Market Commentary

The Fed Cut Rates: What Does It Mean for Bonds?

The Fed Cut Rates: What Does It Mean for Bonds?

PIMCO’s Tiffany Wilding, U.S. economist, and Scott Mather, CIO U.S. Core Strategies, discuss how the Fed’s 0.25% rate cut may affect markets, including 10-year U.S. Treasuries, and where rates are likely to go from here.

Visit What’s Next for Interest Rates for PIMCO’s latest thinking on rates and markets.

Load more results Load {{cCtrl.fetchResults}} more results