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Global Bonds Q&A: An Anchor in Uncertain Times

With a potential economic downturn ahead, we see an increasingly strong case for high-quality global bonds, which can offer potentially both attractive yields and renewed diversification attributes.

What are the benefits of global fixed income in the current economic environment?

As we head into an environment of greater uncertainty, global fixed income can be a strong anchor in multi-asset portfolios. We believe bonds continue to look attractive at current yield levels, offering a balance between income generation and cushion against economic downside scenarios. Bonds also offer the potential for upside price performance in the event of further economic deterioration.

High quality fixed income, in particular, now offers more attractive yields than it has in several years (Figure 1). Global bonds – such as Treasuries, mortgage-backed securities, and investment grade credit – have now become more attractive to include in a broader multi-asset portfolio.

Figure 1: A Strong Case for Bonds

Figure 1: The graph shows the Yield to Worst* (%) figures for different asset class indices, in order to showcase the difference in yields due to the rate hike cycle from central banks starting in 2022. Yield to worst is the estimated lowest potential yield that can be received on a bond without the issuer actually defaulting. The chart includes the index proxies for: Global Aggregate, Agency MBS, AAA-rated securitized, Investment grade credit, High yield credit, and Emerging Markets. As of 31 March 2023. SOURCE: Bloomberg, PIMCO. Past performance is not a guarantee or a reliable indicator of future results. Index proxies for asset classes displayed are as follows: Agency MBS: Bloomberg MBS Fixed Rate Index (incept: 1/30/76), Global Agg: Bloomberg Global Aggregate USD Hedged (incept: 1/1/99), HY Credit: ICE BofA US HY BB-B Rated Index (incept: 12/31/96), EM: JPMorgan EMBI Global USD Hedged (incept: 12/31/93), IG Credit: Bloomberg US Credit Index (incept: 1/31/73). * AAA-Securitized YTW computed as average of AAA CLOs, CMBS, and ABS from JPMorgan and Barclays.

A high-quality, diversified global bond strategy aims to provide attractive returns through a combination of income (yield) and capital appreciation while at the same time preserving capital. Such a strategy can also offer diversification relative to an investor’s equity allocation, which can help smooth out the path of returns.

With yields higher relative to recent history, bonds offer potential for both higher income and greater capital appreciation. This means that their diversification benefits in the event of further economic deterioration are now even stronger. We also expect that historical negative correlations between high-quality bonds and equities will reassert themselves, thus improving the hedging characteristics of this asset class.

Why PIMCO for global bonds?

With over 30 years’ experience in managing dedicated global bond strategies totaling over $100 billion in assets, PIMCO is uniquely positioned to manage global bond portfolios.

PIMCO’s global strategy fully leverages our time-tested investment process to derive the best ideas from PIMCO’s specialist portfolio managers who cover every sector of the global fixed income market, while remaining consistent with the firm’s macroeconomic outlook.

Our global bonds philosophy revolves around the principle of diversification. With the firm's Secular and Cyclical Outlooks as a foundation, the global portfolio management team partners with PIMCO’s investment committee and specialist desks to construct a global model portfolio. By identifying favorable secular and cyclical trends, we seek to capitalize on relative value opportunities and better navigate major market events. Moreover, we can use all sectors of the global bond market to find diversified sources of return, benefiting from PIMCO’s expert views on interest and exchange rates, as well as credit and country trends.

Ultimately, we aim to outperform market benchmarks by investing for the long term, taking measured risks through multiple concurrent strategies and maintaining a disciplined focus on PIMCO’s secular views. We incorporate behavioral science insights to help ensure that our investment team can maximize the interchange of ideas, challenge assumptions, and reduce errors arising from cognitive biases.

Why invest in PIMCO GIS Global Bond Fund?

PIMCO GIS Global Bond Fund is a high quality, diversified strategy that aims to provide attractive returns. This Fund can benefit from likely increasing divergence among regions and countries as the widening of geopolitical fractures accelerate the move from a unipolar world to a multipolar world.

Andrew Balls, CIO Global Fixed Income, leads a deep and experienced team of 13 portfolio managers that combines a top-down and bottom-up approach with strong collaboration across PIMCO’s deep fixed income platform. The Fund has a proven track record. Since its inception, it outperformed its benchmark, the Bloomberg Global Aggregate Index, in 95% of the periods on a rolling five-year basis (Figure 2).

Figure 2: GIS Global Bond Fund Returns (INST USD-HEDGED – ACC)

(Past performance does not predict future returns)

Figure 2: The graph shows the rolling five-year returns of PIMCO GIS Global Bond Fund (before fees) versus the benchmark – from 31 March 2003 through to 31 March 2023. The fund outperformed its benchmark, the Bloomberg Global Aggregate Index, in 95% of the periods on a rolling five-year basis.

This portfolio also provided top-tier performance when compared with its competitors, placing among the top 5% of funds in the Global Morningstar category over a 10-year horizon and having a Gold Morningstar rating.

The recent re-pricing higher in yields offers an attractive entry point into GIS Global Bond Fund, which offers a yield to maturity of almost 5.2% (as of 31st January 2023), while also allowing the Fund to provide more downside risk mitigation for a broader portfolio in the event of a negative economic scenario.

Share value can go up as well as down and any capital invested in the Fund may be at risk. The Fund may use derivatives for hedging or as part of its investment strategy which may involve certain costs and risks.

In March 2023, the PIMCO GIS Global Bond Fund celebrated 25 years since inception. Can you tell us how the Fund has navigated economic and market developments during that time?

The Fund has successfully navigated a quarter-century of financial markets history largely due to our enduring investment philosophy. This includes:

  • A long-term perspective on the firm’s secular views, to minimize the risk of overreacting to ebbs and flows of market sentiment and to avoid exposing portfolios to whipsaw risk.
  • Diversification, as PIMCO takes measured risks through multiple concurrent strategies, seeking to produce more consistent returns than could be achieved by firms that emphasize only one or two techniques.
  • Proprietary research and quantitative tools that increase the firm’s understanding of risk/reward characteristics of individual bonds, bond market sectors, and portfolio strategies are unique in the industry. The firm’s techniques are not black boxes, but rather interactive, stress-testing tools that have helped us to seek out the cutting edge of fixed income product creation.

Our ability to invest across all sectors of the global bond market is a distinguishing feature of PIMCO's process. We believe that having an eye on the entire set of investment opportunities enhances the firm’s ability to operate in each individual market and sector. Understanding relative sector valuation helps us to anticipate the flow of funds into and out of a country's fixed income market as well as sectors within that market.

Share value can go up as well as down and any capital invested in the Fund may be at risk. The Fund may use derivatives for hedging or as part of its investment strategy which may involve certain costs and risks.

How are we thinking about active positions today?

In this current environment, and particularly given the recent banking sector challenges, we want to be careful in overall risk positioning. When uncertainty and volatility go up, liquidity – or the depth of trading in markets – tends to go down, and we’ve been prioritizing liquidity more than usual in our strategies, focusing on more easily tradeable investments and preserving dry powder to seek to take advantage of opportunities that may arise from market dislocations.

We prefer higher-quality, more liquid investments and are avoiding lower-quality, more economically sensitive areas, such as lower-rated floating-rate corporate credit, that are most exposed to the effects of tighter monetary policy.

Within the financial sector, broad-based weakening in preferred shares and bank capital securities has made some of the senior issues from stronger banks look more attractive. Large global banks hold substantial capital and could benefit from the challenges facing smaller lenders. Valuation and the greater certainty of the senior debt’s place in the capital structure reinforces our bias for senior debt over subordinated issues. At the same time, the shock to the AT1 market may help create opportunity in the strongest issuers – especially if European regulators can take concrete steps to differentiate the Eurozone and U.K. market from the challenged Swiss market.

We believe U.S. agency mortgage-backed securities remain attractive, particularly after spreads have widened lately. There may be technical pressures as the Fed lets agency MBS roll off its balance sheet. But these securities are typically very liquid and backed by a U.S. government or U.S. agency guarantee, providing resilience and downside risk mitigation, while prices can benefit from a complexity premium.

1 PIMCO/PowerBI, 31 March 2023.

2 Morningstar Rating, as of 31 March 2023, is for the INST USD-HEDGED-ACC share class only; other classes may have different performance characteristics. PIMCO GIS Global Bond Fund was rated against the following numbers of Global Bond – USD Hedged funds over the following time periods: 4 stars out of 356 funds in category during the overall period; 3 stars out of 356 funds in the last three years; 4 stars out of 282 funds in the last five years, and 5 stars out of 146 funds in the last ten years.
The Author

Andrew Balls

CIO Global Fixed Income

Sachin Gupta

Portfolio Manager

Lorenzo Pagani

Portfolio Manager

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