Pimco is steering clear of US corporate bonds, opting to give up some of the sparkling performance offered by this corner of the debt markets because of concerns over the possibility for a rapid decline in prices in an economic downturn.
Speaking to the Financial Times, the bond giant’s group chief investment officer Dan Ivascyn warned that investors are not being properly compensated in US corporate debt markets, given weakening credit quality and the lack of protections for bondholders.
“The credit sector has been well behaved but if people begin to really fear recession, we can see underperformance quickly,” he said. “This is the sector most prone to overshooting on the downside.”
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The Bloomberg Barclays US Corporate index has returned 13 per cent this year, a sharp bounce back from 2018 losses of 2.5 per cent. Mr Ivascyn said this outperformance could continue for now but added that he is “willing to give up a little yield or price performance over the short term” to protect clients from falling prices.
Pacific Investment Management Co, known as Pimco, is one of the world’s largest bond managers, overseeing more than $1.8tn in assets. Mr Ivascyn’s flagship Pimco Income Fund, the largest actively managed bond fund with assets of more than $130bn, is up 6 per cent this year — lagging 89 per cent of other funds in its category — according to Morningstar data as of October 24.
Mr Ivascyn also told the FT that Pimco remained wary of US Treasuries because of what he sees as the market’s limited potential for further rallies, preferring instead US agency mortgage-backed securities.
So far this year, the Bloomberg Barclays US Treasury index has returned 7 per cent, putting it on track for the best performance in eight years.
Investors rushed to the relative safety of government debt over the summer after a sharp escalation in the Us-china trade war and mounting concerns about the global growth outlook. The seemingly insatiable demand for global bonds pushed yields on roughly $17tn of debt below zero at one point. In early September, the yield on the benchmark 10-year US Treasury note sank to a three-year low of 1.46 per cent.
