PIMCO: Bond Yields Will Not Keep Rising

PIMCO's Eve Tournier says that the large debt burdens of developed economies coupled with an ageing population will keep interest rates low

Emma Wall 11 May, 2018 | 7:45AM
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Emma Wall: Hello and welcome to the Morningstar Investment Conference. I'm Emma Wall and I'm joined today by PIMCO's Eve Tournier to talk about bonds.

Hello, Eve.

Eve Tournier: Good morning.

Wall: So, I thought the first most important point to make from your presentation just here in London, is that although bond yields are rising, Central Bank rates are rising, they're not going to be going too high in your opinion, are they?

Tournier: That's correct. We think that the very large debt burden that are still around the economy and the aging population, those two factors in particular, prevent interest rate from going too high, as the economy would not be able to support, too high level of interest rates.

Wall: Having said that, they are on the rise, we've seen bank rates rise already from the Fed and indeed from the Bank of England, it won't be long, we expect until Europe follows suite. What should investors be aware of, bond investors be aware of, in a rising interest rate environment?

Tournier: Yeah, so, of course, we're in a rising rate environment, interest rate will rise, but we think gradually and ultimately, not to a very high level. But the other factor that investors should be aware of is that over the past several years with Central Bank extraordinary level of support, that has had the impact of dampening asset prices volatility all the way to equity.

And as their extraordinary level of support wanes with the economy healing, then investor should prepare for an environment of slightly rising volatility, we've already started to see that in the first quarter. And I think investor, it's important they prepare for world of higher volatility and to make sure that they calibrate the risk in their portfolio to be able to withstand this more volatile mark-to-market.

Wall: And I think we're all guilty of it, investors are all guilty of it, myself included. We have quite short-term memories and this period of extremely low volatility, as you mentioned across all asset classes is not normal, is it?

Tournier: So, toward the end of last year, we reached level that was in line with the lowest level of volatility we've seen over 30 years. So, it is, yes, extraordinary, and with the repricing we started to see in the first quarter, we're starting to go back towards, we're still not at historical average, but they may not need to be significantly higher than what we have seen.

One word of caution is typically when you move from one vol regime to another vol regime, you tend to over-shoot the historical average a little bit. So, just a word of caution to maybe move up in quality a little bit, maybe de-risk portfolio a little bit, to ensure that the level of risk you're taking is appropriate for what you are able to withstand in terms of mark-to-market.

Wall: And as well as, kind of just being okay, emotionally with that increased volatility. What can investors look for in a bond fund, for example? What's the checklist they should be looking for, for a bond fund, that's going to help weather that higher volatility?

Tournier: So, we think diversification is key. Flexibility, resilience, a portfolio that relies on many sources of assets and – to generate a broader alpha, more broader carry, something that would be more resilient, that will more protect on the downside.

That means moving up in quality, moving in shorter maturity, especially as recently curves have flattened a lot. And look across all the universe of fixed income securities to fund the best risk adjusted returns. And so, those diversified, flexible, income fund we think are quite attractive and a way to weather this environment and still generate attractive income that investor need.

Wall: Eventually, thank you very much.

Tournier: Thank you very much.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar