(Bloomberg) -- Bond investors can still reap equity-like returns in 2024 despite the steep declines in yield from last year's highs, according to Pacific Investment Management Co.
Pimco's latest "cyclical outlook," focused on the next six to 12 months, looks for the bond market's recent gains to be sustained but not extended in a way that would warrant increasing exposure to interest rates, as they recommended in October.
Global yields are "back in line with our expected ranges," with inflation and growth risks "more symmetrical," economist Tiffany Wilding and chief investment officer for global fixed income Andrew Balls write. "At this point, we don't see duration extension as a compelling tactical trade." Newport Beach, California-based Pimco manages $1.7 trillion in assets.
Instead, they favor "an array of opportunities with the potential to weather multiple macroeconomic scenarios," made possible by bond yields still near 15-year highs. Pimco anticipates "a downward shift toward stagnation or mild contraction" this year, with the US faring better than Australia, the UK and the euro-zone, whose economies are more interest-rate sensitive.
"If current economic conditions persist, bonds have the potential to earn equity-like returns based on today's starting yield levels," the report says. In the event of a recession, bonds should outperform stocks, and even if inflation resurges, "high starting yields can provide a potential cushion for bonds."
Pimco expects the Federal Reserve to begin cutting interest rates by mid-year and an eventual return to, or slightly higher than, pre-2020 levels.
But it's too soon to declare victory over inflation, which could flare up again because of "the recent market-based easing of financial conditions" in conjunction with consumer and corporate-sector strength.
Among the strategies Pimco favors is a yield-curve steepening bias based on "the increased bond issuance needed to fund large deficits."
The nearly $6 trillion in money-market funds could experience a swift decline in yields if central banks start cutting rates, Pimco says. Investors "risk missing out by holding cash too long while trying to time a re-entry into markets."
Pimco's other views for the next six to 12 months include:
Treasury Inflation-Protected Securities (TIPS) are "reasonably priced"
US agency mortgage-backed securities and other high-quality assets backed by collateral "offer both attractive yields and downside resiliency"
Private markets will offer "some of the best lending vintages" since the global financial crisis" as banks continue to retreat from some types of lending
"Greater downside economic risks" outside the US could drive better outperformance by other bond markets
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