PIMCO, the U.S. bond giant managing $1.9 trillion in assets, announced it is increasing its exposure to bonds in developed markets outside the United States due to potential complications arising from inflation and the Federal Reserve's shift toward a lower interest rate policy. In its latest asset allocation outlook report released on Wednesday, portfolio managers Erin Browne and Emmanuel Sharef outlined their expectation that easing central bank policies will bolster bonds in markets like Australia, Canada, the United Kingdom, and the eurozone. However, they remain underweight in U.S. fixed income due to the likelihood that America's economic growth will continue to bring rising inflation.
"The global economic and market outlook suggests diverging paths among regions and sectors," Browne and Sharef wrote in the report. "In fixed income markets, we're adding to our investments in select countries outside the U.S. where easier monetary policy this year is likely to boost bonds."
Market Overview:
-Bond giant PIMCO increases exposure to developed markets excluding the US, anticipating inflation challenges for the Federal Reserve.
Key Points:
-PIMCO expects central bank easing in select regions like Europe and Canada to benefit local bond markets.
-The firm remains cautious on US Treasuries due to persistent inflation and the Fed's potentially delayed rate cuts.
-While bullish on corporate debt, PIMCO prioritizes securitized credit over high-yield due to default concerns.
Looking Ahead:
-PIMCO's strategy emphasizes diversification and favors US equities for their resilience in a potentially higher-rate environment.
-The prolonged high-interest-rate scenario in the US could pose risks for certain sectors like commercial real estate and regional banks.
-Despite US economic strength, PIMCO acknowledges the lingering possibility of recession.
U.S. Treasury (TLT) yields have surged much of this year as robust economic and inflation data have defied market expectations for a less restrictive monetary stance by the Federal Reserve. Although Treasuries rallied this month, 10-year benchmark yields remain up over 60 basis points since the start of the year. Futures markets have also shifted their bets, now pricing in 44 basis points of cuts compared to 150 basis points in January.
PIMCO remains bullish on corporate debt markets, particularly securitized credit, but is underweight on high-yield bonds due to the potential for rising defaults. The firm favors U.S. equities over other markets, citing continued signs of economic strength. However, the prospect of higher U.S. interest rates for longer than expected could pressure parts of the economy vulnerable to borrowing costs, like commercial real estate, private credit, and regional banks. "This means that although the factors that have contributed to U.S. economic resilience appear durable, we can't rule out the risk of recession," PIMCO noted.
