PIMCO braces for global economy’s 'hard landing’

The U.S. Federal Reserve, European Central Bank and Bank of England have been raising rates quickly after criticism that they were too slow to react to rising inflation.

At a conference in Sintra, Portugal last week, the three leaders indicated that further action is needed as inflationary pressures persist. On Friday, the Nasdaq Composite posted its strongest first half of the year in 40 years, part of expectations that US interest rates will soon peak.

But core inflation, which is used as a measure of underlying price pressures as it strips out volatile food and energy prices, was 5 per cent in the US and the eurozone, while rising to 7.1 per cent in the UK. Until May.

Mr Iwassin said: „We have a real legitimate inflation problem today. As long as inflation is comfortable, it will be difficult for central banks to ease policy, even if the economy weakens. [2 per cent] goals.”

PIMCO, owned by German insurer Allianz, is making the funds „more defensive and more liquid” in 2022 as investors withdraw following a terrible year for bond funds.

The California-based manager had 75 billion euros ($122 billion) in exits last year, but Mr Ivassin said flows had „improved materially” as investors were now getting higher yields on offer. Allianz said PIMCO attracted €14 billion in assets in the first quarter of this year.

While PIMCO thinks a „soft landing” is the most likely outcome for the US economy, the group avoids parts of the market most vulnerable to a recession, Mr Ivassin said.

Currently favoring high-grade government and corporate bonds, he is waiting for the company’s credit ratings to be downgraded, which he said could prompt forced sales among vehicles such as collateralized debt obligations in the coming months and years. It will be time to negotiate.

’Target Rich’

„A large trade taking advantage of the violent repricing of the public markets and waiting for the private markets to adjust over the next few years should be a really attractive opportunity,” he said.

„We think the next two, three years are going to be full of opportunities for the high-yield space, because it holds some cash.”

However, he cautioned that this cycle could be different than previous ones. Central banks are unwilling to provide support for fear of rising inflation, while more risks have been shifted to private markets to slow but not prevent credit rating downgrades.

„This may be an old-fashioned cycle that continues for a few years with inflation rising, but policy makers are not coming to the rescue,” he said.

PIMCO’s move to safer bonds is part of a broader industry shift toward higher quality fixed income assets. Bank of America’s latest survey of fund managers shows that investors have been overweight investment-grade bonds since 2008 compared to their high-yield peers.

Even for investors who don’t think central banks can get inflation back on target, fixed income offered the best value we’ve seen in „many, many years”, Mr Ivassin said, along with real inflation-adjusted yields in the US. levels not seen since the global financial crisis.

„You can be defensive in terms of interest rate risk, inflation risk, credit risk and generate very attractive returns,” he said.

„That’s different from saying, 'Buy everything and everything will be fine.'”

Financial Times