10-year US Treasury yields have remained range-bound since June last year and the trading range has been very clear, varying between 2.5 and 3 percent, suggesting borrowing is back, said Anthony Crescenzi, a portfolio manager at PIMCO.
The US economic growth is expected to accelerate to about 2.8 percent this year from the low twos that has been the norm for a number of years. The US 10-year yields are expected to slowly rise as the monetary policy normalizes and is likely to trade between 2.75 percent and 3.75 percent in future, meaning investors should be a little bit short in maturities expecting rates to rise and be in the front-end of the yield-curve.
With the shorter maturities, the Fed is protecting the investors and is indicating it will be doing so for at least till the middle of 2015, as one key Fed member – William Dudley of New York Federal Reserve Bank said recently, he observed.
Asked if risk-seeking investors should opt for more equities, Tony said PIMCO is neutral on equities as there is a near consensus on growth projections this year. Equities could fare well in 2014 though much will depend upon whether or not the consensus projections and PIMCO forecasts are proven accurate.
In bonds, risk-seeking US and global investors could consider the front end of short-maturities in Italy and Spain. There’s a high amount of liquidity and “roll down”. Roll down means how much the price of a bond will gain simply because it ages; e.g. a three-year maturity in a year is a two-year maturity and investors need to know how much the yield will decline and affect the price. This can boost the total return of a bond by a fairly significant amount. So one-and-a-half percent yield in three year maturity securities could actually give a return of more than three percent simply because of the “roll down” effect.
Also, investors could consider government bonds of Brazil and Mexico, on weaknesses particularly, as those markets seem to be settling down from the taper tension of last May. Investors need to be cautious though on emerging markets more generally. PIMCO wants to take advantage of select opportunities in the countries it favors such as Brazil and Mexico, he noted.
Asked if Asia looked attractive, Tony said PIMCO wants to be underweight duration in Japan because rates are so low that investors don’t get adequately compensated for the various risks like high inflation and higher fiscal deficits. In general, PIMCO is cautious about treading into markets globally and favors the US, having very little foreign currency exposure, as it seems when the Fed transitions from one policy regime to another, global markets become quite disruptive.
In terms of Australia, rates probably move similarly with US Treasuries although the recent slowdown in the economy, which is related to the slowdown in the mining sector, means rates probably won’t be rising much. However, they could fall more on further disappointments such was seen recently in employment statistics. Global opportunities are very broad, but one has to be extremely selective in this volatile climate, he argued.
Asked to comment on investment opportunities in the global bond universe, Tony said Italian and Spanish debt in the front-end of the yield curve looks attractive, and they are very liquid as well. Yields in Brazil and Mexico have moved up considerably because of capital flows. Also, PIMCO will be underweight on Japan and fairly neutral on Australia. In terms of corporate credits, PIMCO will be overweight in the US and Europe, he concluded.
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