Income Fund Update: Compelling Yields Today, Potential Price Appreciation Tomorrow

Many investors remain in cash, but we think it’s time to shift exposure to bonds.

Today’s bond market offers the potential for equity-like returns with less risk thanks to the highest yields in recent history. 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 portfolio is positioned not only for higher yields currently, but for potential resilience and price appreciation across a range of future economic scenarios.

Q: What contributed to the Income Fund’s strong performance in 2023?

Ivascyn: It was a challenging but exciting year for fixed income. Yields ended the year about where they started, but with tremendous volatility in between. This volatility provided opportunities to tactically adjust duration (interest rate sensitivity), add exposure around the globe in areas with attractive relative value, and diversify our sources of return. Rallies can happen quickly. For investors reluctant to shift out of cash, I think 2023 offered a good example of how being patient and able to withstand a little volatility in bond markets can lead to additional return above what is already an attractive yield.

Q: Interest rate markets expect many developed market central banks to start cutting rates, which suggests a slowdown. On the other hand, credit spreads remain tight, indicating perhaps a more optimistic macro outlook. What is PIMCO’s outlook for U.S. Federal Reserve policy and the U.S. economy?

Ivascyn: Our base-case forecasts anticipate inflation will continue moderating, though sticky wages may prevent it from quite reaching central bank targets. The progress on inflation means that many developed market central banks, the Fed included, will likely cut rates this year in an effort to support growth. Still, we think the markets – both equity and fixed income – appear too optimistic about how quickly central banks will cut rates.

We think the market is rightly suggesting that a soft landing in the U.S. is possible. However, credit spreads and equity valuations factor in a very low probability to the risk of either a recession or of inflation reigniting. Monetary policy takes time to filter through the economy, and we see supply and demand growth across developed markets stagnating. In our view, this suggests a higher risk of recession in many developed market economies than markets are currently pricing.