Investors face tremendous uncertainty amid elevated inflation and recession risks and bouts of market volatility. Here, Dan Ivascyn, who manages PIMCO Income Strategy with Alfred Murata and Josh Anderson, talks with Esteban Burano, fixed income strategist. He discusses why he sees opportunities for active managers in the current environment, and how the portfolio is currently positioned.
Q: How would you characterize the environment for bonds going forward?
Ivascyn: After many years of low yields and tight spreads, we see a more favorable environment emerging in which producing attractive returns for bond investors should be less challenging. Spreads are wider, yields are higher. We are beginning to see good long-term value and believe that although interest rates are rising, they will remain lower than they have in the past, certainly not returning to the levels of the late 1970s and early 1980s. In our view, the current market volatility presents attractive opportunities for active managers. We have built up a tremendous amount of portfolio flexibility to take advantage of mispricing created by the volatility and uncertainty, and we are optimistic. Having a broad global opportunity set, unconstrained by any type of benchmark that drives asset allocation decisions, provides an advantage, in our view.
Q: How was the Income Strategy able to navigate the first quarter – a period in which the U.S. Aggregate Index saw its worst quarter since 1980, and risk assets sold off?
Ivascyn: The first quarter was a very challenging environment for most financial assets. Investors faced persistently high inflation, shifting monetary policy expectations, and geopolitical shock. Policymakers across both the developed and developing worlds are now reversing years of accommodation, and it’s led to a powerful sell-off for fixed income broadly. We’ve seen flattening in yield curves and some moderate weakening in credit.
In the Income Strategy, we’ve navigated these challenges by positioning defensively around interest rate risk and asset allocation. Going into this period, we anticipated central bank tightening would lead to higher volatility and, while credit was performing very well, we significantly increased overall flexibility by moving into more liquid credit and raising cash.
We believe this positioning will enable us to take advantage of ongoing volatility, which we think is here to stay for the foreseeable future, and will provide attractive opportunities throughout the year.