Income Fund Update: Attractive Yields, Resilient Returns

We see compelling value in high-quality, liquid fixed income assets that may offer potential resiliency if the economy weakens.

With proper positioning, today’s bond market may offer the potential for equity-like returns with less risk. Here, Dan Ivascyn, who manages the PIMCO Income Fund with Alfred Murata and Josh Anderson, talks with Esteban Burbano, fixed income strategist. They discuss how the fund is positioned to seek higher yields and the potential for price appreciation that fixed income is now offering while striving to remain resilient in the face of economic uncertainty.

Q: Recent inflation reports suggest the Fed may be near the end of its rate-hiking cycle, yet the economy has considerable momentum, particularly in the labor markets. What is your outlook and how does that impact portfolio positioning?

Ivascyn: Our base case projections anticipate core inflation will trend lower but linger above central bank targets for several quarters in the U.S., Europe, and some other developed economies. This path to central bank targets may also be bumpy and could include a slight reacceleration in core inflation over the next few months. Monetary policy takes time to filter through the economy, though, raising the risk of a recession when the full impact of the sharpest tightening cycle in decades is felt. We think the risk of at least a mild recession before central banks get inflation back near target levels may be greater than half.

With that in mind, we’ve increased credit quality in the Income portfolios, while seeking ample liquidity to pursue resilience and flexibility in the face of an uncertain economic trajectory. These high-quality assets can provide compelling yields, with potential downside resilience and price appreciation should we slide into a recession. Our flexibility has already enabled us to take advantage of market dislocations in high-quality assets that have been caused by fear or sudden shifts in economic expectations. We expect volatility across the globe to continue into 2024, providing fertile ground for active managers.