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Investing for Income: Meeting the Challenges of a Low Yield Environment
For many investors, generating a high and sustainable income stream is challenging in the current secular landscape, which PIMCO calls The New Neutral. Over the next three to five years, we expect to see global economies converging to modest trend growth rates as central banks are constrained to set policy rates at levels well below those that prevailed before the financial crisis.
Equities: Enhancing Your Small Cap Allocation
Our New Neutral outlook is generally supportive of equities: Low discount rates, recovering but muted inflation and a drawn-out business cycle argue for positive equity performance. However, full valuations and uneven growth suggest returns may be significantly lower than long-term averages. This means that capturing equity alpha will be critical for investors to meet their return objectives.
The Three Gluts
by Joachim Fels of PIMCO,
While the global savings glut is likely the main secular force behind the global environment of low growth, lowflation and low interest rates, both the oil glut and the money glut should help lift demand growth, inflation and thus interest rates from their current depressed levels over the cyclical horizon.
The B-Side of Capital Preservation
by Jerome Schneider of PIMCO,
Vinyl single records have two sides: The A-side is always the well-known hit song by the musician, and the other, called the “B-side,” is often a lesser known (or unknown) work. When it comes to cash management, the hit song on the A-side – “Capital Preservation Is King” – has been played over and over since the financial crisis.
Money Market Reform: Reflections on This Critical Inflection Point for Cash Liquidity Investing
by Jerome Schneider of PIMCO,
On July 23 2014, the Securities and Exchange Commission (SEC) formally approved additional reforms for money market funds. These changes will directly impact institutional investors and definitively alter the dynamics of liquidity markets.
Bond Market Liquidity: Don’t Confuse Investment Risk With Systemic Risk
by Douglas Hodge of PIMCO,
It is not surprising that the subject of bond market liquidity has come under increasing focus among regulators, investors and the media. While banks are now better capitalized, the combination of post-crisis capital and liquidity regulations and a lower return environment has made them less able and less inclined to function as market makers. Although bank-oriented regulation has made the system more resilient and less levered, it has also had the practical effect of reducing liquidity in markets that have historically relied on banks to support trading, such as in the corporate bond market.
The BOJ’s Policy: What’s Next, More Easing? Or Something Else?
by Tomoya Masanao of PIMCO,
Investors are now debating what the next step will be for the Bank of Japan. It is a dramatic turn, isn’t it? Earlier this year, the consensus view was that the BOJ would move forward with additional easing – the question was ‘when’, not ‘if’.
Secular Outlook: Implications for Asia-Pacific Investors?
by Eric Mogelof, Alan Isenberg of PIMCO,
We hope you have had the opportunity to review the summary from our secular forum in May: “The New Neutral Revisited,” written by PIMCO’s Group CIO Dan Ivascyn, Global Fixed Income CIO Andrew Balls an?d Global Strategic Advisor Rich Clarida. In this analysis, the authors identify the six key themes that emerged from our discussion, as well as six risks.
Volatility as an ‘Opportunity Class’
Is volatility an asset class? It’s a question we often debate, internally and with clients. There’s no simple answer. Either way, though, it’s an academic point that matters less than our belief that volatility is an “opportunity class” – one with a variety of tactical and macro implications.
Earning an Illiquidity Premium in Private Credit
With low yields and tight spreads prevalent in traditional liquid fixed income markets, many institutional investors are considering whether higher returns are available by assuming credit risk in private or illiquid form. We believe this type of alternative credit strategy may enhance portfolio returns, but investors should be extremely judicious when giving up liquidity, particularly today.
Data Dependence Is Not a Monetary Policy, But Are the Dots?
by Richard Clarida of PIMCO,
At its June meeting, the Fed emphasized data dependence in setting monetary policy.
Although a data-dependent Fed is one that appears to retain a great deal of optionality on the timing and pace of future rate moves, data dependence itself is not a monetary policy.
The Fed’s reaction function to evolving data will likely determine the path of policy normalization. The “dot plot” provides some insight, but the dots alone don’t tell us how policy will play out if the macro data evolve differently from the baseline.
Outrunning the Bear: Pension Strategy in a Low Return World
by Jared Gross of PIMCO,
Pension investors often seek to meet two conflicting objectives: delivering high absolute returns and managing risk relative to liabilities.
Unfortunately, this approach has not produced the desired result because the strong absolute performance of risk assets has been eclipsed by even-faster growth in liabilities.
With the era of surging liability values most likely behind us, a realistic goal today may be a relative one: outperforming the value of liabilities, by a smaller margin perhaps, but with more diversification and less risk.
Inflation Outlook: Approaching Target
by Mihir Worah of PIMCO,
Over the next three to five years, PIMCO expects the global economy will continue along a New Neutral path in which major economies tend to drift along at modest growth rates. At our annual Secular Forum last month, our global investment professionals rigorously debated the longer-term, or secular, outlook for the global economy and markets, and the broad conclusions we reached are detailed in “The New Neutral Revisited.”
Lies, Damned Lies and Equity Skew?
by Jason Goldberg of PIMCO,
Equity skew, which at its most basic purports to measure the difference in the value of stock options with different strike prices, is one of the most used (and abused) sentiment measures in the equity options market. While skew measures can occasionally offer valuable information on the flows within equity derivatives, they can also be highly misleading.
Picking U.S. Energy, Housing and Other Credit Sectors for the Long Haul
by Mark Kiesel of PIMCO,
Persistent trends in economies around the world are providing opportunities for focused, long-term investors in the credit markets. Mark Kiesel, Chief Investment Officer Global Credit, discusses promising themes PIMCO sees over the next three to five years, including the U.S. energy revolution, the rising Asian consumer, the ramifications of global banking regulation and latent demand in the U.S. housing market. PIMCO’s global investment professionals gathered in May at our annual Secular Forum to discuss our long-term, or secular, views of economies and markets around the world.
U.S. Stands Out Amid Global Sluggishness
by Scott Mather of PIMCO,
A year ago, PIMCO said the world was in The New Neutral, as the path to recovery dragged on years after the financial crisis. Last month, at our annual Secular Forum in which our global investment professionals gathered to discuss our long-term outlook, we affirmed that thesis, and we recently published “The New Neutral Revisited” detailing and updating our views. Scott Mather, Chief Investment Officer U.S. Core Strategies, discusses how the outlook for the U.S. differs, to a degree, from other large economies.
The Affordable Care Act and Low Interest Rates: A One-Two Punch for Health Insurance Portfolios
Two common themes emerged from a recent PIMCO survey of U.S. health insurers: Underwriting performance will be a larger factor in asset allocation, and there will be more emphasis on liquidity and income. For now, health insurers generally expect increased premium volumes and shifts in insured profiles as a result of the Affordable Care Act. Re-examining investment policies and tiering liquid assets can help investment portfolios maintain flexibility while potentially contributing more to the bottom line.
Security Selection and Liquidity Management Are Key in the Steadily Growing Credit Market
by Jelle Brons, David Linton of PIMCO,
Over the past several years, two trends have reshaped the market for U.S. investment grade (IG) corporate bonds: a significant increase in the size of the market (both in number of issuers and issues and in aggregate debt outstanding) and a contraction in dealer balance sheets.
Align the Design: Considering and Evaluating Target-Date Glide Paths
by Stacy Schaus and Ying Gao of PIMCO,
Few responsibilities are as important to defined contribution (DC) plan sponsors as selecting a default glide path that best maximizes a participant’s odds of retiring on time and with sufficient lifetime income. The goal, put simply, is to maximize asset returns while minimizing volatility relative to the retirement liability – precisely what Objective-Aligned Glide Paths aim to achieve.
Monetary Policy at Warp Speed
by Harley Bassman of PIMCO,
An imaginative twist on theoretical physics forms the premise of the science fiction series “Star Trek”: An engine called a warp drive enabled the Starship Enterprise to travel faster than the speed of light, going beyond known space to uncharted, exciting new worlds. The confounding detail was managing the sheer power inherent in the warp drive, including its potential to behave in unexpected ways.
Global Divergence, the Federal Reserve and the Impact on U.S. Insurers
by David Braun, Scott Millimet of PIMCO,
Insurance publication SNL Financial recently sat down with members of PIMCO’s Financial Institutions Group to discuss PIMCO’s latest views on global divergence, the Federal Reserve and the impact on U.S. insurers in their investment portfolio positioning.
Pregnant Pause
by Adam Bowe and Robert Mead of PIMCO,
After re-engaging policy support in February following an 18-month hiatus, the Reserve Bank of Australia (RBA) wrong-footed many in the market by keeping policy on hold in the two subsequent board meetings. So was February's decision a "one-and-done" policy event or the start of a more aggressive easing cycle?
Key Themes for Navigating Credit Markets in Alternatives Strategies
by Joshua Anderson of PIMCO,
Against a backdrop of low volatility and tight spreads, 2014 turned out to be a challenging year for many alternative investors as they watched their trades become crowded, and reverse quickly when expected returns were not realized. One such example was the positioning among investors in advance of the European Central Bank’s (ECB) Asset Quality Review announcement; many had increased their exposure in anticipation of a tightening of European bank-related securities.
Expect Further Divergence in Emerging Market Economies
by Michael Gomez, Lupin Rahman of PIMCO,
Each quarter, PIMCO investment professionals from around the world gather in Newport Beach to discuss the firm’s outlook for the global economy and financial markets. In the following interview, portfolio managers Michael Gomez and Lupin Rahman discuss PIMCO’s cyclical outlook for the emerging markets (EM).
An Open Letter to the Eurozone
by Harley Bassman of PIMCO,
As it has once again become fashionable to send an open letter to foreign dignitaries, now is certainly a propitious moment to help focus attention upon dissolving a perplexing financial impediment. For while limiting nuclear proliferation and reducing armed conflict are headline grabbers, the more mundane topic of cleansing the channels of global finance is in fact a public policy good that can create a positive social impact in real time. As such, I now respectfully offer my thoughts on ways to enhance the effectiveness of the current policy path.
Supply-Side Yellenomics Is (Slowly) Losing Its Grip on Markets
by Tony Crescenzi of PIMCO,
Should investors worry about the possibility that the Federal Reserve might raise interest rates this year? How about the negative economic consequences of the rally in the U.S. dollar? “Hawkish” Fed mistakes?
U.S. and Canada: Continued Recovery With Some Potential for Headwinds
by Ed Devlin, Mike Cudzil of PIMCO,
?Each quarter, PIMCO investment professionals from around the world gather in Newport Beach to discuss the firm’s outlook for the global economy and financial markets. In the following interview, portfolio managers Ed Devlin and Mike Cudzil discuss PIMCO’s cyclical outlook for Canada and the U.S..
Will the UK Election Derail the Recovery?
While the economic outlook for the UK is not without risk, most notably if there is an extended period of political paralysis, the UK recovery is much better shape than during the last general election in 2010 and should stay its course. We believe the benign inflationary backdrop will aid economic growth that saw GDP gains of 0.6% for the final quarter of 2014. In an environment of subdued underlying inflationary pressures and sterling appreciating relative to its major trading partners, the Bank of England can afford to wait to tighten monetary policy.
Duration: To Hedge or Not to Hedge?
Because duration tends to be an important component of the return profile in a bond portfolio, adjusting exposure rather than hedging it away may make sense for many investors. Low duration strategies may provide a level of interest-rate duration that provides a better trade-off between a full market beta (with interest-rate duration) and a fully duration-hedged beta.
Fit & Focused
by Mark R. Kiesel of PIMCO,
Many powerful forces are driving markets and asset prices; chief among them are global monetary policy, technicals and fundamentals.
We use rigorous top-down and bottom-up analysis to identify the best sectors and companies around the world.
We see opportunities in the U.S. (cyclical consumer and housing sectors), Europe (equities, bank capital securities, high yield bonds and corporate hybrids), China (property, technology and Macau) and Japan (cyclical industries, exporters and financials).
Corporate Bonds Offer Opportunities in the Slowing Economy
Lack of corporate leveraging and investment among Australian companies may provide a macro headwind to economic growth and, hence, future prospects for equity investors, but from a creditor's perspective, this should keep credit metrics relatively healthy.
PIMCO's bottom-up analysis has helped identify several opportunities, even within the resources sector, where strong balance sheets, competitive industry positions and sound management build a compelling case for credit investors despite the challenging period ahead.
In a Challenging Environment, Policy Easing Sweeps Through Asia
The key change to our cyclical outlook for Asia: We have further downgraded our growth forecast for China to the low-6% range as real borrowing rates remain elevated. In Japan, we expect growth to recover from last year's technical recession, following the delay in the next value-added tax (VAT) hike and the increase in the Bank of Japan's easing program.
Can ECB Policy Heal Europe’s Ills?
In this interview, Managing Directors Mike Amey, Andrew Bosomworth and Lorenzo Pagani discuss the conclusions from PIMCO’s quarterly Cyclical Forum in March 2015 and how they influence our European investment strategy. They also delve into the impact of the European Central Bank’s (ECB) balance sheet expansion on growth and inflation and reflect on Europe’s improving economic health.
Proposed Changes to U.S. Bankruptcy Code Could Create Opportunities in Distressed Credit
The American Bankruptcy Institute's (ABI) proposals aim to balance the objectives of effective reorganization of debtors and the maximization of asset values for all creditors and stakeholders. The proposals seem to mark an effort to modify the positions of different creditor classes in bankruptcy, a move that could disadvantage both senior and junior creditors depending on the particular case.
Equities: Enhancing the Core/Satellite Framework
by Sabrina Callin, Andrew Pyne of PIMCO,
?In a lower-returning environment, investors may need to look beyond traditional active or passive approaches in order to capture equity alpha. The “building blocks” of equity alpha include high active share stock selection, smart beta-based strategies and portable alpha approaches. These complementary sources of alpha can be implemented in an enhanced core/satellite framework to allow investors to pursue the returns needed to meet their objectives.
Positioning U.S. Community Bank Investment Portfolios for 2015
When market uncertainty is elevated and bank profitability is an ongoing concern, taking an extreme view toward investing cash or harvesting liquidity is not optimal. Currently, we do not see as much value in interest rate or duration risk for bank portfolios as yields imply a moderate path for future policy rates. We believe there are opportunities for banks to earn income without taking excess interest rate risk or limiting flexibility against the need to fund future opportunities.
With the Bank of Canada, Is the Canadian Economy in Good Hands?
A disorderly decline in energy prices could spill over into consumer and business sentiment, which would worsen any drop in Canada's economic output. More rate cuts this year are likely a part of the Bank of Canada's base case scenario. Investors may be able to improve their returns by buying bonds with high-quality credit spreads, including Canadian bank senior debt and Ontario bonds.
While the World Is Not Flat, Distributions May Be
?Investors have long relied on the assumption that asset returns are normally distributed with correlations that are slow to change. Based on our analysis, however, we now have flat distributions and correlations that are much less stable; a fat-tailed event to either the left or the right is as likely to occur as a non-event. Active management that recognizes and adapts to these changes will be essential to seeking strong returns in the future.
Why the Bond Market Is Yielding Negative and What Negative Yields Mean for You
by Vineer Bhansali, Ben Emons of PIMCO,
Negative yields on bonds are no longer unicorns. In Switzerland, Germany, Denmark and several other European countries, government bonds are trading at negative nominal yields. There are four potential reasons that can explain the negative yield conundrum and can also illustrate the trade-offs between different investment strategies.
Results 1,051–1,100
of 1,684 found.
