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Short-Term Outlook: Putting Market Liquidity in Perspective

With liquidity, market volatility, and higher yields top of mind among investors today, there are ways to be proactive about cash management. Jerome Schneider, head of short-term portfolio management, explains.

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Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Jerome Schneider, Head of Short-Term Portfolio Management

Jerome Schneider: We view liquidity through two different lenses primarily: market liquidity, and portfolio liquidity.

Text on screen: Market liquidity: The ability to buy and sell bonds efficiently, continuously, and economically

Images on screen: PIMCO trade floor

With regards to market liquidity, we want to think about how instruments that we can transact in can typically be effectuated. For fixed income, it's primarily through over the counter. Thus, when we find during times of stress that liquidity can disappear, oftentimes with wider-bid offers, lower efficiency, higher economic cost, we want to be mindful of how we transact risks for those clients in those portfolios and minimize cost, and most importantly, maximize capital efficiency at that point in time.

Text on screen: Portfolio liquidity: The structuring of a portfolio to be consistent with desired strategy objectives

Images on screen: PIMCO trade floor

With regard to portfolio liquidity, we needed to be thinking about how to construct portfolios that are potentially more resilient in these times of stress.

Investors have increasingly become aware of the higher rates and higher yields that many central bank policies have brought to us over the past year. Fortunately, over the past 10 years we've seen

Images on screen: Central Banks

central bank policies do something else, cut off the left tail and right tail risks of many of the systemic concerns that we had post the global financial crisis. More importantly, today, it's a systematic concern of deleveraging that we need to be focusing on. The higher cost of capital and higher rates are creating more volatility in the market, and opportunity.

FULL PAGE GRAPHIC: TITLE - Daily change in treasury yield has increased since Covid lows. The graphic shows a line graph that measures the 1-day basis point change in the 2-year US Treasury yield against the average absolute change (2.85 basis points) and the average absolute change in 2022 (6.17 basis points). The graph spans the period of December 2019 to October 2022, and a range of -30 basis points to 30 basis points. It shows some basis point volatility around the start of the Covid-19 pandemic, in February, March, and April of 2020, with volatility peaking at a range of 35 basis points, spanning from a -20 basis point change to a 15 basis point change. After this period, volatility remained stable, near zero daily change for the 2-year treasury yield, from April 2020 until September 2021. Around September 2021, when inflation began to increase, change in values became highly volatile, swinging as much as 30 or 50 basis points in a single day. Price swings peaked in June of 2022, as basis point changes jumped from as high as 30 to as low as -25, but remain quite high at present. The graphic helps the reader understand that basis point changes have been particularly volatile in the past year, far more than in other recent periods. It is also the case that the average absolute change in 2022 has more than doubled the average absolute change over the three year period.

For clients, we can actually see this volatility in real time, looking at the front end of the yield curve here in the United States, even the interday volatility of looking at the 2-year note as an example, we can see yields flummox around various points in time to historical proportions in terms of basis points. As we think about the systematic deleveraging, we want to be proactive in trying to insulate portfolios, focusing on the outlook, but also reconciling the changing market conditions, where we can potentially take advantage of opportunities for clients.

Images on screen: PIMCO trade floor

Investors might be finally breathing a sigh of relief, specifically because yields have moved higher in recent months. While these yields are higher, and for the first time in many years, cash and cash-like alternatives are in fact producing returns and income for investors, there's actually an increasingly apparent structural trait — a differentiation in yields amongst these strategies.

Text on screen: TITLE – Cash and cash-like alternatives: BULLETS – Treasury Bills: Zero default risk, Trades at lower yield than Federal Reserve benchmark, Bank Deposits: Offers overnight liquidity, Lower yielding; Investors may be paying for liquidity they don’t need, Short-Term Strategies: Currently may offer 5%+ yield, with a focus on capital preservation and liquidity management

Treasury bills, as an example, trade at a lower yield than even the Federal Reserve's benchmark rate that's set, so you're paying a premium for owning the security of owning a treasury bill through a lower yield.

Bank deposits, while offering overnight liquidity, are also suffering the same consequences of lower yield on average, as investors and banks specifically do not need the liquidity. Finally, when we think about these strategies, short-term strategies, particularly those focused on capital preservation and liquidity management, offer investors a high quality alternative that may offer investors a yield of more than 5 percent the at this point in time. These higher yields obviously are a very drastic environment than what we've witnessed over the past few years. Investors should be proactive in terms of how they should think about cash management,

Images on screen: PIMCO trade floor

and in today's landscape, we believe they will be handsomely rewarded with those potential, while remaining high in quality in short-dated, short-term strategies.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

DISCLOSURE


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 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.

Liquidity is subject to change based on market conditions.

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.

Strategy availability may be limited to certain investment vehicles; not all investment vehicles may be available to all investors. Investment management products and services are offered by Pacific Investment Management Company LLC ("PIMCO") or its affiliates only to qualified institutions and investors within respective jurisdictions and are not available where provision of such products or services is unauthorized. Please contact your PIMCO representative for more information.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been 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 as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. 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) is authorised and regulated by the Financial Conduct Authority (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. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. 2604517) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) 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 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: 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, respectively. The services provided by PIMCO Europe 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). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (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 is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, Shanghai, 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other) | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. 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, 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, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. 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. 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CMR2022-1128-2613179

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