Bond Market Outlook: Valuations Suggest Potential for Equity‑Like Returns With Less Risk

High-quality fixed-income assets may offer the best return potential in more than a decade along with diversification benefits as a likely recession approach.

The fixed-income market’s massive repricing may offer investors in high-quality bonds the potential for equity-like returns with resilience in the face of a likely recession. Here, Richard Clarida, global economic advisor, and Dan Ivascyn, group chief investment officer, review PIMCO’s longer-term market outlook with Kimberly Stafford, global head of product strategy. They discuss why PIMCO is patiently focused on high-quality assets, while preparing to pivot over the next few years to more economically sensitive or lower-rated areas of the credit markets.

Stafford: What key forces do you expect to affect economies and markets over the secular horizon of three to five years?

Clarida: We expect more aftershocks after a number of acute tensions disrupted financial markets and set off inflation around the world: a once-in-a-lifetime pandemic and a tidal wave of policy stimulus, the invasion of Ukraine, and escalating U.S.-China frictions. Central banks responded with the sharpest rate increases in 40 years, setting off three of the largest bank failures in U.S. history and the collapse of Credit Suisse in Europe. Taken together, these events may have revealed hidden vulnerabilities in the global financial system.

Stafford: What are the implications for fiscal and monetary policy given high debt levels around the world, tighter credit, and the likelihood of recession?

Clarida: Economic volatility will likely rise in the next five years from the relatively smooth decade before the pandemic. Debt-to-GDP ratios have surged in many countries, limiting the capacity of governments to deploy fiscal stimulus, while central bankers, cognizant of quantitative easing’s (QE’s) contribution to today’s inflation, could offer less support in future downturns. Without massive stimulus to buffer downturns, we believe economic cycles will become more pronounced, with risks skewed to the downside.