Yields in the bond market have been fluctuating, creating interesting times for Pimco’s Daniel Ivascyn. However, as the manager of the world’s largest actively managed bond fund, he remains steadfast in his recommendation to investors: Now is the opportune time to transition into bonds.
According to Ivascyn, investors should exercise patience and adopt a longer-term perspective in the market, which he acknowledges will continue to be volatile. However, he expresses greater confidence than ever before that those who make the move from cash or equities to fixed income will ultimately reap substantial returns within the next two to three years.
To clarify, Ivascyn does not claim to predict the pinnacle of interest rates. Nevertheless, he asserts that after experiencing difficulties in 2022, followed by a year filled with volatility, there is renewed value in fixed income investments. He emphasizes that investors can secure attractive rates in a high-quality bond portfolio without exposing themselves to excessive interest-rate risk over a span of two to three years. This argument has been previously highlighted in discussions with major publications, and recent declines in yields have only reinforced his viewpoint. In fact, the yield on the 10-year Treasury recently stood at 4.69%.
Ivascyn suggests focusing on the “belly of the curve,” specifically targeting maturities in the five-year range. Additionally, he finds shorter maturities of two to three years highly appealing. However, he maintains a slightly reduced allocation to longer maturities due to concerns about long-term debt sustainability and supply technicalities.
Though he may not bear the title of “bond king,” Ivascyn is a highly respected figure within fixed-income markets. He plays a pivotal role in guiding Pimco’s impressive $1.7 trillion asset portfolio and oversees the performance of the Pimco Income Fund, which currently holds $126 billion in assets. Consistently outperforming its competitors, the fund has demonstrated exceptional performance throughout the first ten months of 2023. Ivascyn’s influence is further recognized by his inclusion in The 50 list of the most influential individuals in markets.
Staying Defensive in an Uncertain Economy
As a professional copywriter, Ivascyn emphasizes the importance of playing defense amidst geopolitical uncertainty and the potential for economic weakening. While the current U.S. economy shows signs of strength with strong growth, employment momentum, and resilient sectors, there is still a coin-flip chance of a recession in 2024 according to Ivascyn’s models.
To prepare for this possibility, Ivascyn advises investors to be cautious and ready for a recession, even though it is not guaranteed. This approach is reflected in the portfolios, including the income strategy.
Additionally, Ivascyn suggests considering Treasury inflation-protected securities (TIPS) as a hedge against inflation. Although inflation in the U.S. seems to be moving in the right direction, Ivascyn expects it to remain above central-bank targets well into 2024. Consequently, he anticipates that the Federal Reserve will keep its benchmark interest rate elevated and may even raise it if inflation accelerates again.
Despite this cautious outlook, Ivascyn believes that remaining nimble and defensive can present opportunities for investors to go on offense in the future. While a hard-landing for the economy is unlikely, there is still a possibility. In such a scenario, the Federal Reserve might find itself constrained in its ability to address both inflation and economic decline.
In conclusion, Ivascyn advises being prepared for potential economic slowdown and diminished support from the market. However, he also recognizes that this situation could create a great buying opportunity if markets overshoot fundamentals due to fear and uncertainty. By adopting a defensive stance now, investors can navigate through this uncertain landscape and make informed investment decisions.
Key Takeaways:
- Hunkering down and playing defense makes sense amidst geopolitical uncertainty and potential economic weakening
- Models show there’s a chance of a recession in 2024
- Treasury inflation-protected securities (TIPS) can act as a hedge against inflation
- Stay nimble and defensive, but be prepared for potential buying opportunities in the future
- The Federal Reserve may face challenges in managing both inflation and economic decline
