Tina Adatia, Fixed Income Strategist: Joachim, how is PIMCO thinking about relative duration positioning across the regions?
Joachim Fels, Global Economic Advisor: I guess the first thing to say is, ten-year yields of 1.5%, 1.6% in the U.S., it’s really low. I mean, it’s lower than what you would normally expect outside of recessions. But as discussed, recession risk is elevated,
Chart: A chart shows five secular trends that have the potential to disrupt the global economy, financial markets and portfolios over the next several years: China, populism, demographics, technology and financial market vulnerability.
and there are all kinds of disruptions that might happen. You know, secular disruptions.
Chart: A chart compares current global yields to their respective lowest historic levels as of September 2019. The yields compared are U.S. 10-year Treasuries (highest yield levels), 10-year JGB, 10-year bund (lowest yield levels), and 10-year gilt.
And in that case, obviously, U.S. rates or U.S. bonds offer the most room for rally. They still have considerable upside in terms of prices. And downside in terms of yield, whereas, obviously if you get a big risk-off event, bond yields will go more negative, Japanese yields will go more negative, but there’s a lot more room for U.S. to rally. So this is why, I think, having an allocation and being in a bond portfolio, being overweight U.S. duration versus global duration makes a lot of sense to us. And you have to think about it in terms of the capital appreciation that you can get if things go wrong.
Andrew Balls, CIO Global Fixed Income: Yeah. So in terms of hedge yield, for example, if you’re a U.S. dollar-based investor, the hedge yield, the picture looks a little bit different, bonds, actually ten-year bonds yield a little bit more than ten-year treasuries, as you benefit from the FX hedge back to the U.S. dollar.
In terms of generating yield, or income, that’s a little bit more balanced. But as Joachim said, if you're looking for capital gains potential, that could clearly happen in the case of the U.S., in the event of a downturn.
Shots of Frankfurt, Germany and the European Central Bank building.
In Germany, say, you probably need a more significant shift on the part of the ECB towards even more negative yields to get significant moves there. And given the balance between the costs and the benefits of negative policy rates — it’s very unclear that that’s something the ECB can do very much more. So, the U.S. is the cleanest dirty shirt, if you’re looking for capital gain potential to hedge risk assets across a lot of our portfolios. You’ll see we’re overweight the U.S. versus the rest of the world.
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