Summary
- Despite some exemptions, pauses, and negotiations around U.S. tariff policy, trade-related uncertainty remains elevated, driving continued market volatility and underscoring our conviction in high quality, globally diversified fixed income.
- Equity valuations remain tight, and with the potential for front-end interest rates to come down in the second half of the year, intermediate-maturity fixed income remains attractive versus both equities and cash, in our view.
- With a flexible, global toolkit and robust liquidity, the Income Fund remains well-positioned to capitalize on opportunities amid volatility.
Markets have roiled from the dramatic and evolving tariff policies of the Trump administration. Here, Dan Ivascyn, who manages the PIMCO Income Fund with Alfred Murata and Josh Anderson, responds to questions from Esteban Burbano, fixed income strategist, about market volatility and uncertainty. They discuss the importance of stability in this uncertain macro environment and the attractive opportunities in bonds, as yields remain high.
Q: Markets have been volatile as the Trump administration pursues a new tariff regime. How do you view the volatility in the context of the macro environment?
A: This period of volatility is unique in that it is related to a conscious policy decision and style of implementation rather than an exogenous shock. We had expected uncertainty from President Donald Trump’s policies, as he widely telegraphed that resetting global trade would be a key priority. Trump has been a proponent of tariffs since the 1980s, long before he held office. But we, and many others, were surprised by the absolute level of tariffs and the Trump administration’s method of calculating them.
The macro ramifications could be troubling. We believe the extreme level of proposed tariffs announced on 2 April would meaningfully raise the chances of a U.S. recession and higher inflation. Subsequent negotiations and reprieves have lowered the temperature somewhat, but trade-related uncertainty is likely to persist.
Our base case is there will be further productive negotiations with many of the U.S.’s trading partners seeking to limit or avoid reciprocal tariffs, while the universal 10% tariffs will remain. More targeted tariffs on select industries are likely here to stay.
While April’s market volatility was significant – and many investors were unnerved in particular by the sharp rise we saw in the 10-year U.S. Treasury yield – bond yields overall remain high and are attractive in our view, both in absolute terms and relative to other segments of the market. Additionally, we expect such periods of uncertainty and volatility to create opportunities.
Q: The dramatic market volatility has led to some questions about whether markets remain well-functioning. What are you seeing?
A: Markets are functioning fine; they’re just moving around a lot. As with previous episodes of volatility, we see some early selling in higher-quality assets as investors liquidate what they can to de-risk, deleverage, or raise liquidity. This in turn can lead to some spread widening in the higher-quality segments of bond markets. These segments are generally default-resistant, in our view, with limited material risk of downgrades or defaults.
However, we are mindful of more credit-oriented borrowers that are highly leveraged. A recessionary shock at a time when covenants are weak and spreads are tight could pose challenges, and there’s arguably a bit of complacency in these markets.
As a result, we continue to believe in this environment that it’s wise to maintain resilience by focusing on high quality assets and by seeking stability, as we mention in our latest Cyclical Outlook.
Q: How do you see the Federal Reserve navigating this period of uncertainty?
A: The Fed is in a difficult position, facing the potential for stagflation. As I said, tariffs could accelerate inflation even further above the Fed’s target, and even if we see enduring trade deals, inflation is likely to remain elevated for longer. At the same time, these trade policies can weigh on growth.
We expect the Fed will look for greater clarity over tariffs and other policies of the Trump administration. We think it’s likely the Fed will be patient to the degree that markets continue to function in an orderly manner, and Fed officials will be very careful about appearing to provide more direct stimulus to the economy at a time when inflation is running above central bank targets. That said, a sharp decline in economic data, especially if unemployment rises significantly, could prompt the Fed to cut rates more aggressively in the latter half of 2025.
Q: With such extreme volatility, how should investors think about bonds versus other assets?
A: Things are highly fluid, but as of this conversation, while equity valuations have loosened somewhat, they remain tight on a historical basis, particularly when compared with high quality bonds. Similarly, credit spreads have widened but still remain relatively narrow versus recent history.
An interesting question now is why have valuations in riskier assets not sunk further? One reason is very powerful technicals – think of a coil wound tight. A great deal of credit has shifted to private markets, where it’s not typical to mark to market that risk. Another reason is that recent market volatility has clearly resulted from Trump administration policy decisions, with investors unsure of the extent to which the administration will calibrate policy to market reactions.
The silver lining is that if investors get greater clarity on the administration’s reaction function, markets could snap back, particularly in those higher-quality areas where spreads have widened recently. Indeed, we have already seen the administration appear to demonstrate some sensitivity to Treasury market moves, and how markets can rebound following adjustments in tariff policy.
Q: How are you thinking about duration and curve positioning in this environment in the context of the Income Fund?
A: We are generally neutral to slightly overweight on duration, but if the market overshoots, we would certainly consider adding a bit more interest rate exposure.
Considering the significant macro and policy uncertainty, we are generally underweight the long end of yield curves, favoring more short- to intermediate-term maturities. And alongside U.S. exposures, we continue to diversify our interest rate risk globally, favoring the U.K. and Australia, for example. Additionally, duration in Europe is an interesting space to watch as parts of the region commit to greater spending on defense.
Q: How are you thinking about credit and positioning credit exposure in the Income Fund?
A: We continue to see attractive return potential in higher-quality assets, especially as we have seen some repricing while fundamental risks have not appeared to increase. Despite credit spreads becoming gradually more attractive, we remain patient given elevated uncertainty, and we stand poised to add credit exposure should we see more significant selling of corporate cash bonds. Currently, we tend to maintain a preference for senior structured credit.
Consumer asset-backed risk remains generally resilient, in our view, as U.S. consumers overall are in a fundamentally strong financial position. For years, home prices have risen, and we are seeing loan-to-value ratios across pools of mortgage assets below 50%. Such homeowners are compelling prospects to provide an auto loan or co-sign on a student loan. We also look for opportunities globally to capitalize on attractive consumer fundamentals outside of the U.S.
Q: What are your views on agency mortgage-backed securities (MBS)?
A: Agency MBS continue to look attractive on a relative basis. While we have seen some spread widening versus Treasuries amid recent interest rate volatility, the asset class has generally performed well this year, exhibiting its traditional defensive characteristics. We continue to have the unusual situation where agency mortgage spreads are actually wider than investment grade corporate spreads, allowing us to pick up additional yield in an asset class that benefits from a U.S. agency or U.S. government guarantee.
To that point, our base case is that the mortgage agencies (often called government-sponsored enterprises or GSEs) will likely remain part of the U.S. government. Outside of the base case, if the Trump administration looks to privatize the GSEs, we believe privatization would be done in a way that maintains the high quality of agency MBS.
Q: How is the Income Fund positioned in emerging market (EM) investments?
A: We remain selective in our exposure to emerging markets given broader geopolitical and macro uncertainty. Nonetheless, we maintain a modest allocation to EM debt as a source of yield and diversification, focusing on countries with attractive levels of real yield versus the U.S.
While we anticipate continued trade tension with China, negotiations with trading partners in Southeast Asia and South America may provide a favorable tailwind for longer-term performance.
Q: Finally, let’s end on currencies. While not necessarily a large portion of the Income Fund, currencies are a critical component of a global toolkit. What are your views on the U.S. dollar versus other currencies?
A: The administration’s policies could lead to further dollar weakness over the long term. Strong demand for the dollar has long reflected both its status as the global reserve currency and U.S. exceptionalism, the latter of which has been at least partially eroded over the last couple of months. Thus, we are tending to maintain a slight underweight to the dollar with an eye to move further underweight as markets develop. (For details, please see our recent PIMCO Perspectives, “Trade Wars and the U.S. Dollar.”) With the adjustments to global trade underway, we see a very exciting environment to take advantage of relative value in currency trading across a handful of developed and emerging market currencies.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Disclosures
Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your investment professional or PIMCO representative or by visiting www.pimco.com. Please read them carefully before you invest or send money.
Past performance is not a guarantee or a reliable indicator of future results.
Investments made by a Fund and the results achieved by a Fund are not expected to be the same as those made by any other PIMCO-advised Fund, including those with a similar name, investment objective or policies. A new or smaller Fund’s performance may not represent how the Fund is expected to or may perform in the long-term. New Funds have limited operating histories for investors to evaluate and new and smaller Funds may not attract sufficient assets to achieve investment and trading efficiencies. A Fund may be forced to sell a comparatively large portion of its portfolio to meet significant shareholder redemptions for cash, or hold a comparatively large portion of its portfolio in cash due to significant share purchases for cash, in each case when the Fund otherwise would not seek to do so, which may adversely affect performance.
It is important to note that differences exist between the fund’s daily internal accounting records, the fund’s financial statements prepared in accordance with U.S. GAAP, and recordkeeping practices under income tax regulations. It is possible that the fund may not issue a Section 19 Notice in situations where the fund’s financial statements prepared later and in accordance with U.S. GAAP and/or the final tax character of those distributions might later report that the sources of those distributions included capital gains and/or a return of capital. Please see the fund’s most recent shareholder report for more details. Although the Fund may seek to maintain stable distributions, the Fund’s distribution rates may be affected by numerous factors, including but not limited to changes in realized and projected market returns, fluctuations in market interest rates, Fund performance, and other factors. There can be no assurance that a change in market conditions or other factors will not result in a change in the Fund’s distribution rate or that the rate will be sustainable in the future. For instance, during periods of low or declining interest rates, the Fund’s distributable income and dividend levels may decline for many reasons. For example, the Fund may have to deploy uninvested assets (whether from purchases of Fund shares, proceeds from matured, traded or called debt obligations or other sources) in new, lower yielding instruments. Additionally, payments from certain instruments that may be held by the Fund (such as variable and floating rate securities) may be negatively impacted by declining interest rates, which may also lead to a decline in the Fund’s distributable income and dividend levels.
A word about risk: 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. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. References to Agency and non-agency mortgage-backed securities refer to mortgages issued in the United States. U.S. agency mortgage-backed securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. Securities issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Diversification does not ensure against loss.
The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.
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 long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.
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 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. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world
PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY, 10019 is a company of PIMCO.
Investment Products
Not FDIC Insured | May Lose Value | Not Bank Guaranteed
CMR2025-0502-4465532
© PIMCO
Read more commentaries by PIMCO
