Income Strategy Update: Investing Amid Inflation Concerns and Lower Yields

With global growth rebounding amid uncertainties over inflation and COVID-19 variants, investors may want to consider a somewhat more cautious and flexible approach when seeking a consistent yield. Here, Dan Ivascyn, who manages PIMCO Income Strategy with Alfred Murata and Josh Anderson, speaks with Esteban Burbano, fixed income strategist. They discuss PIMCO’s economic and market views along with current portfolio positioning.

Q: What are PIMCO’s high-level views on markets in 2021, including trends in interest rates, valuations, and liquidity, and what are the key investment implications?

Ivascyn: One major driver in markets in the past few months is the high overall level of liquidity. Given generally low yields around the globe, and tighter spreads in many sectors, we are seeing investors continuing to seek yield by going into more credit-sensitive sectors relative to higher-quality, lower-yielding investments.

The path of the economic recovery across regions is another important story. Recent data suggest that we may see a more moderate and uneven recovery than some market participants expected earlier in the year. We believe several major developed economies may have already reached peak growth. We remain generally constructive on growth and expect the global rebound to give way to a moderation in 2022, though still at an above-trend pace. From an investor’s perspective, when we compare the post-COVID-19 recovery with the years following the global financial crisis, we see much less margin for error. A lot of good news is already embedded in market pricing, in both equity and fixed income markets. Valuations are becoming a concern in some areas.

Over the past few months, we have seen a moderate rally in interest rates. Looking ahead, we could see a fairly volatile period, perhaps with rates rising somewhat off of recent lows. Our view is that compensation for taking interest rate exposure is at relatively low levels.

We believe this is an environment that calls for a bit more caution, some incremental risk reduction, particularly in areas that have rallied a lot. We think investors should be creative in putting together a portfolio, and perhaps be willing to give up some short-term yield for better resiliency going forward. In the PIMCO Income Strategy, we have been looking to increase liquidity and flexibility to potentially take advantage if markets overshoot. We are focused on diversification and implementation as opposed to heavily overweighting any particular sector of the market. And as always, we look across a global opportunity set and leverage the depth and breadth of our investment teams.