PIMCO: Starting valuations fuel 2025 bond performance
Dan Ivascyn, Group CIO at PIMCO, discusses drivers of strong bond market returns in 2025, the outlook for fixed income, risks and opportunities in private credit and valuations in equities vs. bonds.
Comments from Dan Ivascyn include:
On 2025 bond market returns and the outlook for fixed income
“It's been an exciting year from a performance perspective. And there've been a lot of areas of the market that have worked in terms of generating return, maintaining liquidity and maintaining investment flexibility. But really, the attractive starting yield has been the driver of those returns. There's been also a lot of relative value opportunities across yield curves. At the front end of the yield curve, shorter maturities have outperformed longer maturities. The United Kingdom, even the long end of the Japanese market, or Australia, all provide very attractive yields when you hedge back to the US dollar. So these have been great diversifiers, reducing portfolio volatility and also generating attractive returns.”
“The dollar itself has weakened a little bit this year, another key theme of ours. A very small dollar underweight, expressing relative value views across some of the more liquid, higher quality currencies across the globe, have provided some incremental return. Last but not least, what we call the credit sectors have been quite target rich as well. So high yield, lower quality credit has performed well, consistent with the elevated equity returns, but we've also been able to generate very attractive returns for our clients in higher quality, more resilient areas of the market.”
“We’re excited about the year. More importantly, we’re excited about the prospects for future returns as well, with yields still elevated, offering attractive opportunities and lots of less correlated cycles around the globe allowing us to generate attractive returns again versus the passive alternatives that are out there.”
On private credit
“Yes, there are some concerns, but it's not about private credit versus public credit. I think the right way to look at credit is across the liquidity spectrum. Am I getting paid to take less liquidity? And then across the credit or the economic sensitivity spectrum. The more economic sensitivity I have, the lower quality that particular form of credit risk, the more spread compensation that we as investors want to get.”
“What's important to note is that after many, many years of very strong credit performance, we have very tight spreads, we've had a lot of growth in some of the more economically sensitive areas of the credit markets. That's true of bank loans, which are considered more public in nature, or of private credit, with mid-market direct lending as an example, which is considered more private. Given the expansion we've seen in these markets, given some of the deterioration in underwriting, it shouldn't be a surprise that there are a few credit problems. We do think that some of these areas of the market that have grown too quickly are going to disappoint investors.”
“What's great is that as an active investor - and I use the term investor as opposed to deployer - this is very exciting. It allows us to make relative credit decisions, focus on areas that are more resilient in nature. And when you do have that economic slowdown, people will see the difference between resilient and less resilient profiles. So, our mindset at PIMCO is let's maintain liquidity, which means future portfolio flexibility.”
On equities vs. bond market valuations
“If you look at the starting valuation for equities and high quality fixed income today, and compare those relative valuations over multiple decades of history, on a forward basis bonds are expected to do quite well – absolute, relative to equities, relative to their lower anticipated volatility and relative to cash. So, whatever mix you had for the last 10 to 15 years between stocks, bonds, cash and other instruments, you probably want to shift a little bit of money away from these sectors that have served you well, but are stretched from a valuation perspective. I think the same mindset holds within equity markets. You have significant dispersion, significant differentiation across sectors from a valuation perspective. So, there's a lot of attractive, active decisions that can be made within that space.”
“But I think the bottom line starting valuation is where investors should be more cautious. As an insurance policy, we think it makes sense to diversify a little bit into fixed income. I think the same is true - and perhaps I even have a stronger level of conviction - as it relates to cash, because the cash rate with near certainty is heading lower, at least over the near term. For the first time in a long time, the cash rate is heading to a level meaningfully below the yield you can get in an intermediate duration high quality bond portfolio.”