Income Strategy Update: Positioning for Volatility and Interest Rate Uncertainty in 2022

Amid rising volatility and near-term inflationary pressures, we favor a defensive approach while positioning for attractive opportunities. Here, Dan Ivascyn, who manages PIMCO Income Strategy with Alfred Murata and Josh Anderson, speaks with Esteban Burbano, fixed income strategist. He discusses PIMCO’s economic and market views along with current portfolio positioning.

Q: What is PIMCO’s high-level economic outlook? And do we believe inflationary pressures will persist this year?

Ivascyn: We are cautiously optimistic about the outlook for economic growth over the next couple of years. But this is a fast-moving cycle characterized by uncertainty, both economic and geopolitical. Inflation has lingered much longer than most market participants anticipated, and the near-term inflation outlook remains uncertain. Our base case calls for inflation to trend lower during the second half of 2022, but the risks that it will prove sticky are elevated. COVID-19 variants also create uncertainty over the recovery’s timeline. And if the omicron variant creates additional supply bottlenecks, it could push inflation even higher.

Q: What is our view on central bank policy around the world?

Ivascyn: Central banks appear prepared to act decisively if necessary to contain near-term inflationary pressures; in some emerging markets we’ve already seen fairly aggressive policy responses. Our base case calls for the U.S. Federal Reserve to raise interest rates over the next few months, and potentially reduce its balance sheet. The Bank of England is continuing to tighten policy, while the European Central Bank is likely to remain more cautious.

The market has grown accustomed to significant central bank accommodation. Real rates across most of the developed world are deeply negative. As a result, as central banks tighten, we anticipate greater volatility and uncertainty.