Russia’s invasion of Ukraine and the world’s subsequent sanctions and actions to curtail Russia’s access to the global financial system have thrown financial markets into turmoil. Here, Dan Ivascyn, who manages PIMCO Income Strategy with Alfred Murata and Josh Anderson, talks with Esteban Burbano. They sort out the changing calculus of the fixed income opportunity set, highlighting PIMCO’s economic and market views along with current portfolio positioning. This interview took place on 3 March 2022.
Q: How are the terrible events in Ukraine and unprecedented economic sanctions on Russia affecting PIMCO’s views on growth and inflation?
Ivascyn: The tragic situation in Ukraine has added extreme uncertainty to an already uncertain growth and inflation outlook. We are ratcheting down our growth outlook and boosting our inflation expectations for developed economies amid a rising risk of inflation. We have trimmed our growth forecast across the developed world by about a percentage point, slightly more in the U.S. And we believe inflation will linger this year at higher levels than we had forecast prior to the war, with much of it concentrated across Europe. For 2023, our base case calls for prices to stabilize, but there is a lot of uncertainty surrounding our outlook. We’ll refine our global macro outlook at our March Cyclical Forum, and share those views later this month.
Despite this uncertainty, we believe most markets appear generally fairly valued, and in some areas expensive, within a historical perspective. The flight to quality in bonds that we would normally expect in a global crisis has been tempered by expectations for central bank tightening, creating a concerning environment for risk assets. With elevated inflation lingering, central banks, particularly the U.S. Federal Reserve, will be forced to tighten, likely heightening the risk of recession.
We are focused on mitigating risk, preserving capital, diversifying prudently, managing liquidity, and fine-tuning the portfolio by adding select higher-quality risk.
Q: What is your outlook for central bank policy, and how is the Income Strategy positioned to navigate upside inflationary risks as well as rising rates?
Ivascyn: We believe that many major central banks will raise interest rates several times this year, but likely at a more gradual pace than they would have planned before the Ukraine crisis. Our latest forecasts call for central banks to tighten a bit less than what is embedded in markets. If the economy were to deteriorate significantly, we think central banks would likely slow the tightening process.
We remain broadly defensive regarding interest rate exposure in the face of extreme market uncertainty and what we believe are fairly full valuations. That said, in the Income portfolio, we have slightly increased our interest rate exposure in response to higher rates, rising geopolitical uncertainty, and an increased recession risk.
To help counter inflation risk – which the war in Europe has heightened – we hold duration in inflation-linked instruments, including a core holding in U.S. Treasury Inflation-Protected Securities (TIPS).