Viewpoints

Straight From PIMCO: Our Take on Credit Markets

PIMCO CIO Global Credit Mark Kiesel discusses how credit markets are pricing in the evolving economic climate and where PIMCO is beginning to see opportunities.

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Kiesel: There are two factors driving markets today, fundamentals and technicals. Let me first start with fundamentals.

Fundamentally, the global economy is increasingly in shut down mode. This is temporary, and we’ll all get through this. Companies and people will need support, and governments are stepping up to do so. Central banks are also stepping up around the world.

There’s clearly a high degree of uncertainty now in global markets. And we may see default rise, even materially for low quality assets.

Nevertheless, we entered this period today from a position of strength in several ways. Number one, private sector imbalances were lower. Number two, consumers and high quality businesses are healthy. Number three, the banking system is well-capitalized. There’s no question that China is slowing, but they are recovering. And the US and Europe, and other economies around the world will too.

It’s important to note, from a credit perspective, is many investment grade companies have strong balance sheets.

The second factor which is driving markets today is technicals.

No question market liquidity has been challenged over the last few weeks. Social distancing policies have caused many trading desks to be more thinly staffed for sell side firms. And large moves in markets have also exacerbated swings. Leverage has been unwound in some trades.

This has actually caused forced selling to occur. And now high quality assets such as investment grade credit, mortgage backed securities and asset backed securities, look very cheap to us.

Today’s markets have actually moved ahead of economies in terms of pricing and risk. Credit markets have now priced in a recession. Markets are pricing in higher defaults that we would typically see in most recessions. And today we are seeing good opportunities globally in high quality credit assets.

So how are we evaluating companies and markets today?

PIMCO has strong relationships with companies all over the world, and in fact, we’re speaking with these companies every day. Companies in the eye of the storm, including the travel and tourism industry: airlines, hotels and autos. These industries will need support.

But governments globally are stepping up and we’re seeing that in the airline industry. Many companies today actually have very strong balance sheets and are well-prepared for this crisis. For example, many companies today like the telecom industry, the tower industry, the cable industry, utilities and supermarkets are well-positioned to handle today’s crisis. Many of these companies are focused on liquidity, but they’re proactively taking steps.

So what are we doing today at PIMCO to analyze companies and what are we watching?

The path of the virus and the severity, when will we have this under control? and it’s impact on the global economy, the global policy response both fiscal and monetary, global financial conditions, credit markets - can companies issue new bonds into the market, the health of the global banking system, market liquidity, and the long-term health and fundamentals of companies and the economy.

In the global credit markets today, we want to stay in high-quality and defensive non-cyclical companies with strong balance sheets that can weather the storm. And most importantly we wish all of you well through these challenging times.

Disclosure


Past performance is not a guarantee or a reliable indicator of future results.

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. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. U.S. agency mortgage-backed securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. Securities issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.

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.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963) and PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch and Spanish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act and the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). 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CMR2020-0319-1124907

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