Economic and Market Commentary

How Fed Easing May Affect Investments

Scott Mather, CIO of U.S. core strategies, makes the case for higher-quality, more defensive portfolio positioning as the Federal Reserve appears ready to cut interest rates further.

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Sinha: What is the Fed’s apparent reembrace of rate cuts mean for other assets like the dollar? What other themes are we finding compelling in PIMCO portfolios today?

Mather: It’s likely that the dollar is, if not at a peak, or very close to a peak. Because some of the big drivers of dollar strength in the last few years have been expanding growth differentials between the U.S. and the rest of the world.  We’ve likely peaked out on that. And expanding rate differentials. And we’ve very likely also peaked out on that.

So without those as being powerful propellants of the dollar forward, it’s likely it’s a much more mixed picture. Maybe we don’t have a big dollar move but certainly the tailwind that was propelling it higher seems to be fading into the past.

And with respect to other asset classes, given where we are in the cycle, you know if we have successful insurance cuts which prolong this cycle, which seems like a reasonable base case, you know, the case is for higher-quality but still a more defensive posture with respect to spread assets and spread risk in the portfolio.

So yes, there’s certainly a place for investment grade credit in a high-quality portfolio but there we would stress defensive themes and keep the duration, the tenor of the investments shorter in maturity and higher in quality than in a normal part of the cycle.

And then once again duration itself is attractive in the U.S, particularly in that five to seven-year part of the yield curve where that’s the part of the yield curve where you still get sort of the most benefit of rate cuts.

But you also as in most rate-cutting cycles, when we get to a more serious and deeper part of the rate-cut cycle, the next time we get a serious threat to the growth outlook, that’s where you’ll get the best risk-adjusted returns in our view. So that’s a very sensible core position to build the portfolio around.

Disclosure


“Insurance” rate cut is considered to be a preemptive cut made in an effort to stimulate the economy.

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 low interest rate environments increase this risk. 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.

Duration is the measure of a bond's price sensitivity to interest rates and is expressed in years.

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. The investment strategies contained herein are not based on any particularized financial situation, or need, and are not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific PIMCO or other strategy, product or service. Investors should consult their investment professional prior to making an investment decision.

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.

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CMR2019-0813-410396

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