Pacific Investment Management Co. (Pimco) anticipates that bond investors can still achieve equity-like returns in 2024, despite the notable yield declines from last year’s highs. In their latest “cyclical outlook” focusing on the next six to 12 months, Pimco envisions that the bond market’s recent gains will be sustained, emphasizing an array of opportunities amidst varied macroeconomic scenarios.
Key Insights:
- Yield Levels and Global Economic Conditions: Pimco notes that global yields are now “back in line with expected ranges,” with inflation and growth risks appearing more balanced. The report by economist Tiffany Wilding and Chief Investment Officer for Global Fixed Income Andrew Balls suggests that the current economic conditions, with bond yields still near 15-year highs, provide the potential for bonds to deliver equity-like returns.
- Tactical Approach to Duration Extension: Contrary to extending exposure to interest rates, Pimco recommends a tactical approach, favoring an array of opportunities that can navigate diverse macroeconomic scenarios.
- Macro View and Regional Variances: Pimco anticipates a potential “downward shift toward stagnation or mild contraction” in 2024. The report highlights regional differences, with the U.S. expected to fare better than Australia, the UK, and the euro-zone, whose economies are more sensitive to interest rates.
- Bond Performance in Different Scenarios: In the event of a recession, bonds are expected to outperform stocks. Even if inflation resurges, the report suggests that the high starting yields in bonds can serve as a potential cushion.
- Federal Reserve’s Interest Rate Actions: Pimco expects the Federal Reserve to initiate interest rate cuts by mid-year, aiming for a return to or slightly higher than pre-2020 levels.
- Caution Over Inflation: While acknowledging recent easing of financial conditions and strength in the consumer and corporate sectors, Pimco advises caution against declaring victory over inflation, which could potentially flare up again.
- Preferred Strategies:
- A yield-curve steepening bias based on increased bond issuance to fund deficits.
- Treasury Inflation-Protected Securities (TIPS) are considered reasonably priced.
- U.S. agency mortgage-backed securities and high-quality assets backed by collateral are viewed as offering attractive yields and downside resiliency.
- Private markets are expected to provide some of the best lending opportunities since the global financial crisis, as banks continue to retreat from certain types of lending.
- Risks and Money-Market Funds: Pimco highlights potential risks for the nearly $6 trillion in money-market funds, suggesting a swift decline in yields if central banks start cutting rates. Investors are cautioned against holding cash for too long while attempting to time market re-entry.
