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Taking Seniority: Looking to Bank Loans in Uncertain Markets
by Elizabeth (Beth) MacLean of PIMCO,
Bank loans are senior secured loans to non-investment-grade corporations. They are floating rate instruments, secured by the collateral of that company and senior in the capital structure. Bank loans can be a more defensive way for investors to move into the high yield space, due to the collateral and their senior position. While we have seen yield spreads tightening among loans, on a relative basis we do think loan valuations still look attractive. PIMCOs investment process helps us seek these attractive opportunities while managing risk.
Promise to Be Irresponsible
by Jeremie Banet, Mihir Worah of PIMCO,
We believe the recent rise in real rates and fall in inflation expectations could jeopardize the U.S. economic recovery. We also believe these are a direct result of uncertainty about the Federal Reserves ultimate goal. Low real yields accompanied by sufficient nominal growth are the necessary prescription for a still ailing economy.
Which Way for Bonds? Mapping a Path Forward
by Bill Gross of PIMCO,
In 1980, the Federal Reserve, led by Paul Volcker, tightened the quantitative noose to tame double-digit inflation, fueling an unprecedented tailwind for bond prices. Thirty years later we find ourselves at the other extreme, as central banks print money in the trillions of dollars to stimulate economic growth, and inflation is abnormally low. While we are not likely to see a repeat of that type of bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds.
How Asia's Growth Transitions and Policy Experiments Are Shaping the Global Outlook
Our view is that Chinese GDP growth will downshift, averaging 6%-7.5% for the next five years as net exports and investment are reaching their limits. In Asia, Japan is perhaps the economy closest to the T-junction described in PIMCOs global secular outlook: The destination of Japans journey looks increasingly uncertain, with multiple potential outcomes that could stabilize or destabilize the global economy and markets.
Managing the Odds: Overcoming Exit Strategy Biases with Tail Risk Hedging
by Vineer Bhansali of PIMCO,
Rather than making an exclusive choice we believe that rebalancing, options purchase and diversification should all be considered on the same footing. Is it better to dynamically de-risk if markets begin to fall to lock in gains, or is it better to purchase explicit tail hedges? Our tendency, as humans, to be time-inconsistent, with behavior changing as the situation changes, makes dynamic rebalancing prone to behavioral biases. At pricing levels of low option premia the purchase of options to prevent time-inconsistent behavior seems like a judicious decision.
Liquidity Markets Likely to Evolve Under Proposed Money Market Reforms
by Jerome Schneider of PIMCO,
We view the SECs proposed regulations on money market funds as a pivot point for cash and liquidity management. If the first proposal is adopted, prime institutional money market funds would convert to a floating net asset value share price. That conversion would likely cause some volatility in pricing. As we do not expect yields to increase in the near-to-medium term, in our view the risk-reward tradeoff would not be as attractive for investors.
A Longer Time Horizon Can Be an Advantage for Value Investors
by Mark Cooper of PIMCO,
We believe that given challenging prospects for attractive investment returns, the value premium could become even more important in the years ahead. Even in an uncertain environment like we are currently experiencing, we believe the merit in owning equities for the long term is unchanged: We want to participate as an owner in a growing, profitable business.
Broader Use of Bail-Ins Could Spur a Revival of Asset-Backed Securities in Europe
by Felix Blomenkamp of PIMCO,
We believe ABS issuance will likely increase in Europe as eurozone developments and possible future bail-ins potentially result in higher risk premiums and funding costs for European banks. Although regulators are playing catch-up, capital markets are making room for a more credit-intensive product, helping to lead the way for a resurgence in ABS. Due to concerns over the security of bank deposits, investors may look to the ABS sector, which offers collateralized bonds that are free of bail-in risk.
Will Green Shoots Flourish in U.S. and Latin America?
by Josh Thimons, Lupin Rahman of PIMCO,
The US economy is much further along the road to repair relative to its developed market peers, but it is still dealing with an unsustainable fiscal situation. Latin America is closely coupled to the rest of the world. What happens in the U.S., China and Europe over the secular horizon is especially critical. Our secular investment outlook calls for a more defensive posture toward risk. In U.S. fixed income, this suggests positioning for alpha rather than capital appreciation.
The Role of Cash in Multi-Asset Portfolios
Determining the optimal allocation to cash is as challenging as ever in todays unusually uncertain markets. When allocating to cash, investors should consider a multi-dimensional framework to assess the liquidity of the underlying cash instruments. In our view, the most attractive risk-adjusted opportunities for cash investors lie just outside the traditional money market space.
Wounded Heart
by Bill Gross of PIMCO,
Joseph Schumpeter, the originator of the phrase creative destruction, authored a less well-known corollary at some point in the 1930s. Profit, he wrote, is temporary by nature: It will vanish in the subsequent process of competition and adaptation. And so it has, certainly at the micro level for which his remark was obviously intended. Once proud, seemingly indestructible capitalistic giants have seen their profits fall short of everlasting and exhibited a far more ephemeral character.
Defense and Selective Offense
by Mark Kiesel of PIMCO,
Given the markets newfound risk appetite for credit and less attractive valuations, we are taking advantage of global credit market liquidity in an effort to reduce our overall risk posture. In our selective offense approach, we continue to favor U.S. housing and housing-related areas, in addition to select investments in the energy, pipeline, specialty finance, gaming, hospitals, and airline and auto industries, given the more positive fundamental outlook for these sectors.
Into the Woods
Excess liquidity, falling net issuance and higher correlations among assets complicate the eventual exit that the Federal Reserve and other central banks must make from their extraordinary policies. The Bank of Japans ideology has completely changed to tackling deflation from tolerating deflation. The key focus in the coming months will be how private sectors react. Investors who depend chiefly upon central bank activism may put themselves at risk. They may need to hedge volatility by ensuring their investments are built more on solid fundamentals and reasona
In an Era of Uncertainty and Lower Returns, It's Time for Alternatives
The initial economic and capital market conditions of the 1980s set the stage for a multi-decade bull market for stocks and bonds. Times have changed, however, and traditional investment portfolios are unlikely to deliver returns as healthy as those enjoyed for much of the last 30 years. Its time to think alternatively about asset allocation and index construction, sources of alpha and beta, and risk and return objectives to increase the probability of success in what we believe is a new era for investors and financial markets.
Global DC Plans: Similar Destinations, Distinctly Different Paths
DC plans in in the U.S., Australia and the U.K. may benefit from better aligning asset allocation defaults to workers needed outcome: purchasing power in retirement. Focusing on needed outcomes would suggest a higher allocation to real assets, earlier de-risking and consideration of tail risk hedging.
Reflation in the Balance
by Richard Clarida of PIMCO,
Four of the worlds major central banks are now all in when it comes to ballooning their balance sheets in correlated, if not coordinated, efforts to achieve escape velocity in their economies. In accounting for the impact of quantitative easing on two key balance sheets, we are able to interpret, monitor and calibrate the programs currently in place. This in turn can help us prepare portfolios if or when sentiments and inflation expectations shift.
UK Secular Outlook - Morphing into the Carney Era
The UK remains in a stable disequilibrium, one that needs to either transform into growing economy with narrowing income differentials or risk a more aggressive policy response. Financial repression, protection of real purchasing power, tail risks of accelerated currency weakness and price sensitivity will likely dominate UK markets over the secular horizon. Investors may consider progressively reducing exposure to assets susceptible to tail risks. Higher quality short-dated income-generating, inflation-hedging and non-sterling assets remain attractive.
Filling the Hole We Have Dug
by Adam Bowe, Robert Mead of PIMCO,
Mining investment contributed more than 60% of the growth in Australias GDP in 2012. The expected decline in mining investment will likely leave a significant economic hole in the short term that needs to be filled. PIMCO expects easier monetary policy will be needed to support other sources of domestic growth, such as non-mining business investment, household consumption and housing construction.
Europe's Crossroads: The End of the Muddle Through?
by Andrew Balls of PIMCO,
The eurozone may be nearing a critical junction, owing to its weak growth, weak institutions, debt dynamics and domestic and cross-border political challenges. The German government may take a more active leadership role after its national election, but it is more likely it will continue with piecemeal measures. Considering the current low yield environment and ample central bank liquidity, it is important to focus on absolute yield levels and returns, and consider global alternatives such as emerging market securities and currency exposure.
How to Turn the ECB Straggler into a Central Bank Pacemaker
by Myles Bradshaw of PIMCO,
In our opinion, the ECB will be most effective if it can design a programme that helps banks deleverage more quickly to stimulate growth in the real economy. To have a meaningful impact on Europes broken transmission mechanism, any ECB programme needs to not only lower the cost of credit, but also be regionally tailored or big enough to be effective. Long-term investors should remain focused on the quality of issuers balance sheets rather than simply taking more risk because of lower prospective returns.
As Energy Demand Outpaces Supply, Asia Looks Overseas to Refuel
by Raja Mukherji, Taosha Wang of PIMCO,
Many Asian countries are encountering growing energy shortages due to declining indigenous resources and domestic consumption growth. Oil companies in Asia frequently engage in overseas acquisitions. In many cases, these transactions help enlarge reserve base, access technological know-hows and enhance corporate profitability. Strong sovereign support is a key investment thesis in the Asian oil and gas sector. Through our bottom-up analysis, we are finding numerous investment opportunities.
Stress Points: What High Frequency Data Tell us About Hidden Tail Risks
Whereas rare events that occur over lower frequency, longer horizons are much harder to find (and hence much harder to derive statistics from), intraday events create a larger, more accessible data set that can be used to supplement data on tail events. Analyzing the reactions of different markets to intraday tail events can provide valuable information for investors looking for effective tail risk hedges for their portfolios.
Making the Most of Equity Allocations
by Andrew Pyne, Sabrina Callin of PIMCO,
We believe slowing global growth and deleveraging are likely to result in lower long-term returns for equities. Traditional approaches to building equity portfolios may not be enough for investors to meet their return goals. We have found three complementary ways investors can enhance equity return potential: fundamental indexes, index-plus strategies and high active share stock selection approaches.
Hold Your Houses: The Housing Recovery May Take Longer Than You Think To Reach Consumers
New residential construction needs to double from 2012 levels to meet long-run stable demand, and the pace of that increase is critical. Consumer credit growth is hindered by strict lending standards, continued deleveraging and limits to mortgage equity withdrawal. As a result, the balance of mortgage debt is unlikely to meaningfully increase in the next 12-18 months, delaying a return of the virtuous consumer cycle.
New Normal ... Morphing
by Mohamed El-Erian of PIMCO,
The New Normal has morphed to include consequential elements of a "stable disequilibrium." In the midst of notable multi-speed dynamics, the global economy as a whole is muddling along a road that will give way over the next three to five years to one of two stark alternatives: either sustainable global growth, institutional and political renewal in the West and safe deleveraging; or growth shortfalls that cause financial instability, fuel greater social tensions, accentuate political dysfunctions and complicate debt traps.
Global Bonds: A Flexible Solution for an Uncertain Market
The recent rallies in both safe-haven and risk assets have left many investors in a quandary. We believe alpha, or above-market return, will have to play a greater role for investors seeking to meet return targets. In our view, the current environment affords many opportunities for generating alpha.
There Will Be Haircuts
by Bill Gross of PIMCO,
It has been the objective of the Fed over the past few years to make even more innovative forms of money by supporting stock and bond prices at cost on an ever ascending scale, thereby assuring holders via a Bernanke put that they might just as well own stocks as the cash in their purses. Gosh, a decade or so ago a house almost became a money substitute. MEW or mortgage equity withdrawal could be liquefied instantaneously based on a never go down housing market. You could equitize your home and go sailing off into the sunset on a new 28-foot skiff on any day but S
Europe's Sovereign Debt Problem: A Call for a Clear Destination
Without political commitment to a common fiscal destination, the long-term instability and market distortions within Europes capital markets are likely to intensify. To preserve the euro, the eurozone must develop federal fiscal policies that tackle significant economic, cultural and societal differences and define a credible roadmap to achieving structural reforms, a banking union, political union and fiscal union. Historical precedents in Europe may help guide the way.
Enhancing Credit Returns in 2013
by Andreas Berndt, Ryan Blute of PIMCO,
While credit achieved exceptional returns in 2012, achieving such returns in 2013 will be challenging in light of less upside potential and limited spread compression. Challenged by continued loose central bank monetary policies, alpha generation plays an increasingly significant role in seeking attractive total returns within credit portfolios.
Encouraging investors to provide managers with a variety of innovative approaches and flexibility may enhance the return potential of a European corporate bond portfolio without materially changing overall credit or interest rate risks.
The Pharaoh's Dream
by Andrew Bosomworth of PIMCO,
As yields on assets decline, central banks ultra-loose monetary policies are effectively forcing investors further out the concentric circles into lower quality, more illiquid sectors in search of positive yielding assets after deducting inflation. In order to achieve 6%-7% returns in the future, investors may be required to take on more risk. Allocating part of a portfolio away from middle circle asset classes into assets with higher return potential as well as assets offering liquidity is the right strategy in our opinion.
Hyperactive Monetary Policy: The Good, the Bad and the Ugly
Hyperactive monetary policy (HMP) is in full force as fiscal policy retreats. The benefits of HMP outweigh the costs for now. Despite cyclical growth, we will likely not achieve escape velocity and eventually the costs will likely overtake the benefits.
Global Investing in 2013: Policy Dominance, Active Management and a New Paradigm in Currencies
by Scott Mather of PIMCO,
We expect that the impact of ongoing global policy experimentalism on real economic growth and financial markets will likely vary substantially from country to country, creating both risks and opportunities. With flexible, active global strategies investors can potentially benefit from a broader opportunity set and the ability to go off benchmark in an effort to both avoid risks and tap opportunities.
Telling (Taper) Time
by Tony Crescenzi of PIMCO,
Investors need be alert for signs of progress in the many employment indicators the Fed is watching, and listen closely to what the Fed is saying to know when bond buying will be tapered. The failure to achieve escape velocity is why the Fed is using its printing press to purchase $85 billion of securities monthly. These purchases will continue, the Fed says until the outlook for the labor market has improved substantially. The Fed has made progress toward achieving escape velocity but the progress must be sustained for the Fed to throttle back on its stimulus.
Don't Pay Too Much for That Bordeaux - Or That Bond
by Jeff Helsing of PIMCO,
The financial markets reliance on ratings agencies and benchmarks, along with regulations, can cause distortions in the value of some securities. These price distortions can create potential opportunities for some investors. Investors should consider aligning capital allocation with outcome-oriented objectives that arent influenced by credit ratings or benchmarks.
PIMCO Cyclical Outlook for Asia: How Leadership Changes Are Shaping Asia's Outlook
For Asia, slow but not slowing global growth will likely keep external demand neutral, and policy developments will therefore help shape the economic outlook. In Japan, we see a significant boost to aggregate demand coming from the concerted monetary and fiscal expansion of the new Abe government. In China, concerns about inflation, housing market excesses, and long-term financial stability are prompting policy restraint that should keep growth below 8% this year.
Can Something Good Be Cheap Too?
by Charles Lahr of PIMCO,
Over the last eight years, the least volatile components of the MSCI World Index tended to have lower valuations, higher profit margins and higher dividend yields. This anomaly, which appears to be among the most persistent in all of equity space, is rooted in speculative human behavior such as the lottery ticket phenomenon.
PIMCO Cyclical Outlook for the U.S.: Back From the Brink
by Josh Thimons of PIMCO,
We expect the largest contributors to U.S. growth this year will be housing and related industries, increases in capital expenditures (albeit from very depressed levels), certain manufacturing sectors, such as the auto industry, and the energy sector. We see roughly 1.7 percentage points of drag on GDP coming out of Washington far less than the four to five percentage points of potential drag had there been no fiscal cliff resolution. We believe the Fed will continue with hyperactive monetary policy, which we now call QE Infinity, that does not have an explicit end date or progr
A Man in the Mirror
by Bill Gross of PIMCO,
Am I a great investor? No, not yet. To paraphrase Ernest Hemingways Jake in The Sun Also Rises, wouldnt it be pretty to think so? But the thinking so and the reality are often miles apart. When looking in the mirror, the average human sees a six-plus or a seven reflection on a scale of one to ten. The big nose or weak chin is masked by brighter eyes or near picture perfect teeth. And when the public is consulted, the vocal compliments as opposed to the near silent/ whispered critiques are taken as a supermajority vote for good looks.
Whatever It Takes in Japan? It Takes an 'Audacious' Monetary Policy!
The BOJ will have to make some key monetary policy decisions soon, given Kurodas sincere but ambitious desire to achieve 2% inflation within two years. The BOJ has lagged far behind other major central banks in the deployment of its balance sheet since the onset of the financial crisis. Expect Japans monetary policy to be more aggressive and experimental as it shifts toward reflating the economy. For global investors, this may mean a modest economic growth contribution from Japan, at least over a cyclical horizon, as well as additional central bank liquidity pouring into global m
What Happened to That Export-Led Recovery?
With nearly 50% of the UKs total exports going to Europe, an economic area constantly flirting with its own recession, it is no surprise to see that UK trade performance has been challenged.As the US continues to re-heal, and trade becomes more geographically diversified, we should see exports start to grow once more, albeit off a modest base. The easing in sterling is undoubtedly welcome and will improve prospects for exports, but it is unlikely to be a game changer.
Investors Need to Pivot
by William Benz of PIMCO,
Fixed income investors need to think differently in the current environment. Investors may want to consider pivoting to strategies that are less focused on traditional benchmarks and more oriented to generating income and providing greater flexibility to hedge against rising rates, widening credit spreads or higher inflation.
Rising Political Risk and Ongoing Economic Weakness Challenge a Difficult Journey to Recovery
by Andrew Balls of PIMCO,
Looking ahead, it will continue to be a very bumpy journey as we anticipate economic contraction in the eurozone by -0.75% to -1.25% over the next year, hampered by growing political risk and fiscal tightening. Although we expect the pace of contraction in the eurozone to diminish over 2013, the duration of the recession is likely to be longer than consensus forecasts.
Washington May Be Ready to Take a Break From the Brink
With Washingtons dysfunction not in the forefront, the economy could be more unencumbered to grow, with markets trending in a similar direction. The Feds proactive policies should continue to favor overweight positions in the five-year through 10-year part of the Treasury yield curve and support interest-rate-sensitive sectors of the economy most notably housing. In the longer term, however, we would advise investors to be cautious: Without meaningful long-term structural deficit reform, real growth will inevitably lag in the U.S.
DC Plan Sponsors: Now's the Time to Get More From Bonds
by Stacy Schaus of PIMCO,
Long on equities and light on bonds, todays DC plan lineups may expose participants to extreme market risks. Plan sponsors could potentially improve retirement outcomes by trimming choices for stocks and considering additional options for bonds. The inclusion of active fixed income strategies with global exposure or additional income opportunities could help participants reach their retirement goals.
Forecasting Bond Returns in the New Normal
by Saumil Parikh of PIMCO,
PIMCO has a detailed framework for deriving a forecast for secular bond returns based on our most current expectations of policy rates and the inflation-adjusted (or real) bond risk premium.
We start by defining the expected secular real policy rate as the expected average rate of the fed funds rate after adjusting for inflation over the next 10 years.
Forecasting Bond Returns in the New Normal
by Saumil Parikh of PIMCO,
PIMCO has a detailed framework for deriving a forecast for secular bond returns based on our most current expectations of policy rates and the inflation-adjusted (or real) bond risk premium. We start by defining the expected secular real policy rate as the expected average rate of the fed funds rate after adjusting for inflation over the next 10 years.
Global Volatility
by Josh Thimons of PIMCO,
The Fed's new communication strategy may, in fact, be a more sensible policy prescription than calendar rate guidance. We expect increased market volatility, particularly around economic data releases. Investors with an understanding of the Fed's now increasingly transparent reaction function will find opportunities to profit in the volatility markets. According to our model of the Feds reaction function, presently every .25 of a percent unexpected change in the unemployment rate is likely to lead to roughly an 11 basis point change in the five-year Treasury yield.
The Walk of Life: Stepping Away From Dire Straits and Toward Active Short-Term Mgmt Strategies
Money market investors may find the benefits of recent regulatory and industry reforms bittersweet at best, as they are still tolerating borderline zero percent yields in a persistent low rate environment. Without creative strategies for liquidity management, many investors are finding themselves in the "dire straits" of actual negative real returns on their cash allocations even with modest current levels of inflation.
Love, Money or Disappointment: What Will Asian Credit Investors Find in Their Red Envelopes?
by Robert Mead, Raja Mukherji of PIMCO,
Our cyclical economic outlook for Asia in 2013 is unusually dependent on breakthroughs in structural policies. Although we continue to favor select opportunities in key sectors, in general Asian credit spreads are trading historically tight. Bottom-up research is critical, along with careful top-down views on shifting economic conditions, and investors need adequate compensation for taking credit risk. Some sectors and companies can grow significantly faster than their respective economies.
Results 1,151–1,200
of 1,554 found.
