Income Fund Update: Higher Yields, Wider Spreads, Greater Opportunities
The market sell-off presents attractive opportunities for active fixed income investors despite elevated volatility and recession risks. Here, Dan Ivascyn, who manages the PIMCO Income Fund with Alfred Murata and Josh Anderson, talks with Esteban Burbano, fixed income strategist. Ivascyn discusses where he sees relative value for active managers in the current environment, and how the portfolio is currently positioned.
Q: In the second quarter, the Bloomberg US Aggregate Bond Index slid 4.7% and the Bloomberg US High Yield Index dropped 9.8%. What drove the sell-off and has it changed your outlook?
Ivascyn: Volatility and uncertainty drove the second quarter sell-off. Early in the year and into the second quarter, investors focused on inflation and U.S. Federal Reserve policy. As the quarter progressed, though, their concerns migrated to the impact of policy tightening and geopolitics on economic growth and credit sector performance – concerns that persist today. The market’s dramatic repricing, however, in our view presents better long-term opportunities for active investors than we have seen in years. Yields have risen meaningfully, spreads have widened, and carry has increased, providing a potentially powerful source of return.
Q: Inflation risk is one of the key elements driving this repricing. How are you thinking about inflation risk today and for the cyclical horizon?
Ivascyn: Our base case view is that U.S inflation likely peaked in June but will remain elevated well into 2023, perhaps even 2024, before it trends down toward central bank targets. Although prices of some key commodities are declining and other price pressures have begun to dissipate, we believe inflation will remain a significant risk factor for investors, driven by uncertainty around the war in Ukraine, other geopolitical risks, and the evolution of COVID-19.