Managing more than $1.5 trillion, mainly in fixed-income investments, Pimco carries a big stick in the bond world. Daniel Ivascyn, chief investment officer at Pimco, doesn’t wield that stick on his own. But as the head of fixed-income strategies, he oversees funds involved in everything from Treasuries to emerging-markets bonds, including more than $85 billion in Pimco Income (symbol PONDX), a member of the Kiplinger 25, the list of our favorite no-load mutual funds.
Many investors are bracing for a spike in interest rates, which would push down bond prices. But Ivascyn says rates are likely to remain in a narrow range near current levels, partly because the economy isn’t expanding quickly enough to ignite much inflation (which would prompt the Fed to raise rates more rapidly and likely push up yields across a multitude of bonds). “I’d categorize our view on rates as cautious, not alarmist,” he says.
Against that backdrop, Ivascyn recommends tilting toward Treasuries and high-grade corporate bonds with short- to intermediate-term maturities. Steeper rates could pressure these bonds. But investors would recover losses fairly quickly as they collected additional interest income from higher-yielding bonds. These types of high-quality bonds don’t yield much, but they can be a good buffer against declines in stocks or other risky investments. “When bad things happen, whether it’s a geopolitical event or economic shock, high-quality bonds tend to perform well,” he says.
Ivascyn also likes mortgage-backed securities and bonds issued by companies benefiting from the housing recovery. Mortgage securities would slump if rates were to rise. But Ivascyn holds other investments in funds such as Pimco Income that would gain value in a rising-rate climate, and he expects housing-related bond investments to hold steady even if mortgage rates inch up a bit. “The U.S. housing market is rock-solid,” says Ivascyn.
He also likes some foreign-government bonds. Australian government debt yields a bit more than Treasuries, for instance, and poses virtually no risk of default. Mexico’s currency and government bonds are more volatile. But they got “very cheap” after the U.S. election because of heightened concerns about trade and political friction between Mexico and the U.S. Those issues have since receded, lifting Mexican bonds, which Ivascyn still finds relatively attractive.
One area that worries him is floating-rate bank loans. Investors have flooded into these investments because they should benefit from rising rates. But companies have issued a lot of loans with weak protections for investors, raising the risk of losses if the businesses falter. “Floating-rate bank loans warrant caution,” he says.
(Daren Fonda is a senior associate editor at Kiplinger’s Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org. And for more on this and similar money topics, visit Kiplinger.com.)
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