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After enduring the worst year in a century, bonds are regaining their appeal, attracting the attention of the world’s largest fixed income manager (excluding central banks, of course).
The most recent US CPI report confirms a decrease in inflationary pressures, allowing both two and ten-year US Treasuries to offer positive real yields for the first time in a while.
US junk bonds currently yield an average of 8.2%. Single-A bonds offer a yield of 5.43%. Even the yields of triple-A rated companies stand at 4.8%. In summary, the “there is no alternative” (TINA) era for bonds is over.
Alternatively, as our colleague Katie Martin cleverly put it, bonds are experiencing a renaissance and are now captivatingly attractive — BARBARA. Or, for those who appreciate 1960s cult sci-fi films, bonds are back in an elegant, lavish, and likable manner — BAARELLA (we sincerely apologize).
Unsurprisingly, Pimco, a major bond house, is enthusiastically endorsing bonds. Earlier this summer, Chief Investment Officer Dan Ivascyn argued that bonds provide “equity-like returns with less risk”:
The bond market’s significant repricing allows investors to earn the highest real yields in 12 years without assuming uncomfortable levels of risk. High-quality bonds present the potential for equity-like returns with lower volatility and less downside risk compared to equities — an attractive proposition given the significant risks posed by persistent inflation or an economic downturn. Consequently, we are focusing on less economically sensitive segments of the market that offer high quality, and we are prepared to adjust our strategy as market pricing reflects changes in fundamentals. Specifically, we anticipate rotating into opportunities within the more economically sensitive or lower-rated sectors of the public corporate credit markets, and ultimately into the private markets as they begin to align with true fundamentals.
To be fair, it seems that investors agree with Pimco’s perspective, at least some of them.
Allianz’s recent financial results indicate a positive trend for Pimco, with inflows increasing from €1bn in May to €3bn in June and €6bn in July. This signifies a significant improvement after experiencing €75bn in outflows and substantial losses last year.
Pimco’s assets under management have yet to reach the pre-2022 bond market slump peak of $2tn, but they have rebounded to approximately $1.42tn (see AUMs in euros in the slide below — referenced in the analyst presentation):
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