PIMCO bullish on Treasuries, high-quality bonds after recent selloff - CIO

BY Reuters | TREASURY | 09/28/22 03:20 PM EDT

By Davide Barbuscia

NEW YORK, Sept 28 (Reuters) - PIMCO Chief Investment Officer Dan Ivascyn said some bond valuations have become the most attractive in years after the recent sell-off in fixed income markets and in light of the Federal Reserve's aggressive interest rate hikes, prompting the U.S. bond giant to increase allocations to high-quality bonds in recent weeks.

Benchmark U.S. Treasury 10-year yields, which move inversely to prices, on Wednesday briefly hit a 12-year high of 4.004%, continuing a trend that has seen bonds suffer their worst year ever as the Fed rolls out massive rate hikes to fight stubbornly high inflation.

But amid expectations that inflation may soon start to slow down, Treasuries have started to look attractive, Ivascyn told Reuters on Wednesday.

"We are much more constructive on rates today than really at any point over the last few years," he said, speaking on the sidelines of an investment conference in New York.

Other investors have pointed out in recent weeks that bond yields have reached levels that justify adding exposure despite expectations the Fed will further raise rates.

Vanguard, the world's second-largest asset manager, told Reuters earlier this month that it believes U.S. Treasuries are near the end of a painful decline.

PIMCO, which manages about $1.8 trillion in assets, believes the Fed may need to tighten financial conditions more than what is currently priced in by the markets and more than what the Fed itself has projected. The central bank sees interest rates rising to 4.6% by the end of next year, but Ivascyn said they could go up to 5%.

Still, he said, "we think investors will be rewarded for adding some interest rate exposure at these levels."

The sell-off in Treasuries has gained momentum in recent weeks as the Fed stressed it is determined to fight inflation until it goes down to the central bank's 2% target - dashing some investors' hopes of a policy U-turn in the event of a significant economic slowdown.

"We are respectful of the fact that inflation is high, and it's going to remain stubbornly high for probably the next couple of years," said Ivascyn.

"But, given the tightening in the system, given the inherent lags in terms of policy versus economic impact, we think that value is better and better in the market," he said.

Besides government bonds, assets such as high-quality investment-grade bonds, or agency mortgage-backed securities, have also become more attractive after the recent widening of credit spreads, said Ivascyn.

"You're getting attractive yields relative to what you buy, and you're also getting attractive incremental spread pickup in some of the higher-quality areas in the market," he said. (Reporting by Davide Barbuscia; Editing by Michelle Price and Jonathan Oatis)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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