Inflation Inflection

We Believe

  • In 2021, we expect the global growth recovery will be uneven across sectors and regions. In 2022, the rebound will likely give way to a synchronized growth moderation, albeit to a still above-trend pace.
  • Though some central banks have begun tapering asset purchase programs already in 2021, with others likely to follow, we do not expect any developed market central banks to begin hiking policy rates over our cyclical horizon.
  • We forecast inflation in developed markets will peak in the coming months. However, the exact timing and magnitude is uncertain, largely due to supply constraints.
  • In markets, we are seeing fewer high conviction opportunities, and we believe valuations are generally rich. We think it makes sense to be patient and focus on maintaining liquidity and flexibility in our portfolios to respond to events and opportunities.
  • On duration, we expect to maintain a modest underweight position in our model portfolios. In spread positions, we continue to favor non-agency U.S. mortgages and other asset-backed securities. Within corporate credit, we see little potential for significant spread tightening.
  • We expect to find good opportunities in emerging market (EM) local and external bonds, as well as select EM currencies. But we will take a cautious approach at a time of ongoing COVID-related challenges in EM countries.

Economic Outlook

Over the past few months, economic recoveries have been uneven across regions and sectors. In the case of the U.S., this has contributed to supply chain bottlenecks and a bump up in inflation. Nonetheless, at PIMCO we continue to view the factors driving the recent price surge as transitory and, as a result, haven’t materially changed our broader views on the impact of the pandemic, policy, or economic growth since our March Cyclical Outlook.