Investment Strategies

Anchoring Portfolios: Is Now the Time to Choose Core Bonds?

In today’s late-cycle environment where volatility is rising and valuations are stretched, investors should consider increasing their allocation to core bonds. Fixed Income Strategist, Anmol Sinha explains the potential benefits of investing in core bonds, including why they have a higher return expectation now than in recent years and the diversification they may offer in times of greater market stress.

More from this section

Read Transcript

Anmol: We’ve been having a lot of conversations recently with clients about the role of core bonds in their portfolios today, and why it may be more important than it has been in the last several years.

So investors should be thinking about core bonds today really because of the macro backdrop.

The environment that we are in today is one where we are into the later stages of this expansion. We’re certainly nearer the end than we are the beginning. Volatility is rising. And volatility is rising in asset classes where valuations are extended.

So for the first time in a long time, investors have to really think about the need for diversification in their portfolios. And that’s why we think today is really a good time to be thinking about core bond allocations.

The defining feature of core bonds tends to be that they have a lot of interest rate exposure.

And therefore core bonds tend to be affected when rates rise. Prices fall when rates are rising. So that’s certainly a big concern.

But there may be two reasons why clients should worry less about that.

The first is that we don’t think rates have a lot more to move higher from here. We tend to think rates are generally range-bound, given the fact that they tend to be anchored by growth. Underlying trend growth in economies like the US have not really changed. They’re still fairly low.

So as rates have risen, now they’re kind of in line with where they should be given overall growth environments. If rates don’t have a lot more to move from here, is really my second point.

Which is that, at these yield levels, the higher yield levels, core bonds are more attractive from a return perspective.

The reason is that when you have high yields, that means that your forward-looking return expectation is high.

In fact, core bonds today have a much higher return expectation going forward than they did three years ago. It’s actually hard to stop and think about any other asset class that gives you that kind of profile. And it happens to be the asset class that gives you better diversification in times of market stress.

So we think that core bonds will actually play a very important role in investor portfolios going forward. And that is really one of being an anchor.

So in a world forward where there’s likely to be more volatility, more uncertainty, that need for diversification is really magnified. And so we think investors really need to think about having a true core allocation.

So again, if you think about that backdrop, where we’re in the later stage of the expansion, where volatility is rising, where valuations are stretched, that backdrop really warrants core bonds. The fact that we’re through a lot of this rate move and now perhaps there’s less pain to be had going forward because interest rates are likely to be range-bound.

You don’t have that headwind that you had with interest rates. And in fact, the value you can earn from core bonds, because yields are higher is much better than it was a few years ago. Meaning the value proposition you get, in a time when you need the diversification, is really key.

Disclosure


All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

References to specific securities and their issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold such securities. PIMCO products and strategies may or may not include the securities referenced and, if such securities are included, no representation is being made that such securities will continue to be included.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Filters:
Filters: Reset All

Filters

X
  • Topic/Tag

    Tags

    Reset

    Close
  • Category

    Category

    Reset

    Economic and Market Commentary
    Investment Strategies
    Bond by Bond
    Viewpoints
    Careers
    Education
    PIMCO Foundation
    View from the Investment Committee
    Close
  • Order By

    Order By

    Reset

    Alphabetical
    Most Recent
    Close
() filters applied

Video Finder

Filter By:
Section
  • Economic and Market Commentary
  • Investment Strategies
  • Bond by Bond
  • Viewpoints
  • Careers
  • Understanding Investing
  • View from the Investment Committee
Experts
  • A
  • B
  • C
  • D
  • F
  • H
  • I
  • K
  • M
  • P
  • R
  • S
  • T
  • W
  • Z
Clear
Tina Adatia
Fixed Income Strategist
Olivia A. Albrecht
Executive Office, ESG Business Strategy
Mike Amey
Head of Sterling Portfolio Management and ESG Strategies
Yacov Arnopolin
Portfolio Manager, Emerging Markets
Robert Arnott
Founder and Chairman, Research Affiliates
Andrew Balls
CIO Global Fixed Income
Justin Blesy
Asset Allocation Strategist
David L. Braun
Head of US Financial Institutions Portfolio Management
Libby Cantrill
Executive Office, Public Policy
Richard Clarida
Former Global Strategic Advisor, 2006-2018
Laura Deneke
Sr. Vice President, Product Strategist
Anna Dragesic
Head of Global Credit Product Strategies
Joachim Fels
Global Economic Advisor
David Fisher
Head of Traditional Product Strategies
Gene Frieda
Global Strategist
Mary Hoppe
Daniel H. Hyman
Co-head, Agency MBS Portfolio Management
Daniel J. Ivascyn
Group Chief Investment Officer
Mark R. Kiesel
CIO Global Credit
Nicola Mai
Portfolio Manager, Sovereign Credit Analyst
Naila Makhdumi
Account Manager, Global Wealth Management
Jason Mandinach
Credit Strategist, Mortgage Strategies
Scott A. Mather
CIO U.S. Core Strategies
Mohit Mittal
Portfolio Manager, Liability Driven Investment and Credit
Alfred T. Murata
Portfolio Manager, Mortgage Credit
Sonali Pier
Portfolio Manager, Multi-Sector Credit
Lupin Rahman
Head of EM Sovereign Credit
Emmanuel Roman
Chief Executive Officer
Loren Sageser
Credit Strategist
Steve Sapra
Client Solutions & Analytics
Jerome M. Schneider
Head of Short-Term Portfolio Management
Marc P. Seidner
CIO Non-traditional Strategies
Sapna Shah
Head of Corporate Responsibility
Anmol Sinha
Fixed Income Strategist
Cathy Stahl
Global Head of Marketing
Christian Stracke
Global Head of Credit Research
Geraldine Sundstrom
Portfolio Manager, Asset Allocation
Richard Thaler
Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business
Mark Thomas
Account Manager, Global Wealth Management
Jessica K. Tom
Senior Credit Analyst
Eve Tournier
Head of European Credit Portfolio Management
Qi Wang
Portfolio Manager, Global Macro Hedge Fund Strategies
Niamh Whooley
ESG Engagement Analyst
Tiffany Wilding
U.S. Economist
Andrew T. Wittkop
Portfolio Manager, Treasuries, Agencies, Rates
Mihir P. Worah
CIO Asset Allocation and Real Return
Vicky Zhao
Portfolio Manager, U.S. Rates, Liquid Products
Christopher J. Brightman
Chief Investment Officer, Research Affiliates
PIMCO
Order By
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All
Investment Strategies

Anchoring Portfolios: Is Now the Time to Choose Core Bonds?

Anchoring Portfolios: Is Now the Time to Choose Core Bonds?

In today’s late-cycle environment where volatility is rising and valuations are stretched, investors should consider increasing their allocation to core bonds. Fixed Income Strategist, Anmol Sinha explains the potential benefits of investing in core bonds, including why they have a higher return expectation now than in recent years and the diversification they may offer in times of greater market stress.

Load more results Load {{cCtrl.fetchResults}} more results