AUGUST 2024

AUTHORS

Daniel J. Ivascyn
Group Chief Investment Officer
Portfolio Manager

Income Strategy Update:
High-Yielding, High Quality
Global Opportunities
With yields high and policy rates beginning to drop, we see a compelling
global opportunity set for bond investors.

SUMMARY:• We believe investors should consider locking in today’s higher yields for the potential togenerate attractive returns for years to come.
Esteban Burbano
Executive Vice President
Fixed Income Strategist• We see value in positioning the Income Strategy in high quality assets with sufficientliquidity to navigate market volatility over the cyclical horizon.
• Our position in agency mortgage-backed securities has increased steadily over recent
years, with agency MBS offering the potential for attractive long-term value as market
factors have shifted.
• We generally concentrate our interest rate exposure in intermediate maturities, given
the outlook for central banks to ease policy.

Bond yields are high, inflation is moderating,and some central banks have begun loweringinterest rates – an excellent scenario for bondinvestors. Here, Dan Ivascyn, who manages
the PIMCO Income Strategy with Alfred
Murata and Josh Anderson, talks with Esteban
Burbano, fixed income strategist. They
discuss how the portfolio is positioned for
current high yields and market volatility amid
diverging economic scenarios and interest
rate reduction paths across the globe.

Q: HOW ARE MARKETS RESPONDING
TO MACROECONOMIC TRENDS
THIS YEAR?
Ivascyn: Many investors are focusing on
macroeconomic data, and they should, since
central banks are also focused on that data.
Back in December, inflation numbers were
easing enough that central banks, particularly
the U.S. Federal Reserve, were optimistic
and signaled there could be several rate cutsin 2024. But then first-quarter inflation andgrowth were more resilient than anticipated,and market participants priced out a lot of thecuts that previously had been embedded inrates markets.

2

AUGUST 2024

Recent data have been weaker, and have provided moreneed outsize interest rate exposure, either, to position theevidence that inflation is moderating. Obviously the July

portfolio for attractive return potential, given the income andU.S. employment data raised fears of a U.S. downturn. We

capital appreciation opportunities we see in markets aroundstill believe it’s possible the U.S. has the resilience to avoid

the world today.

recession, though it’s by no means guaranteed. Growth has
slowed across many other countries, including China, andglobally we are seeing less synchronized growth, inflation, andpolicy decisions.

Consider the appeal of the high starting yields today whencore inflation is around 3% and slowing. And if, as active
investors, we can capture these yields, then the portfolio
becomes even more attractive versus equities, and certainlyMarkets tend to respond quickly, and sometimes sharply, toattractive versus cash. Cash yields have begun to fall fromnew macro data – recent volatility is a clear example of that.

their elevated levels in many countries in Europe and in

In our portfolios we’re focused on high quality assets that we

Canada. We see a high probability they will fall in the U.S. as

believe can perform well in soft landing scenarios but also

well. While fixed income investing is not without risk, staying

provide meaningful mitigation of downside risks.

in cash has also become riskier than in the past few years
when considering the likely opportunity costs.

Q: LOOKING OVER OUR CYCLICAL HORIZON OF
SIX TO 12 MONTHS, WHAT ARE THE PATHS FOR
INFLATION AND THE ECONOMY?
Ivascyn: We think inflation will continue to downshift this year

Q: COULD YOU DISCUSS THE OVERALL OBJECTIVE
AND CURRENT HIGH-LEVEL APPROACH OF THE
INCOME STRATEGY?

and next, though it could be bumpy, and there’s still a decent

Ivascyn: Yes – we seek to generate attractive, consistent, andamount of uncertainty. We anticipate overall resilience in the

responsible income for investors. We also seek to provide

U.S. economy, while the data continues to suggest somesignificant value versus passive alternatives, and I believe

slowing in key areas, and the fiscal picture is concerning.

this is one of the most target-rich environments we’ve seen

Outcomes will vary depending on who is elected president

in many years to look to provide that value. Active asset

and whether the same party controls one or both houses ofmanagement is especially critical in uncertain times, andCongress. Monetary policy will also be a key factor; the Fed isgiven the shifting policies, political scenarios, and geopolitical

likely to start cutting rates in September.

unrest worldwide today, we also maintain an eye toward
portfolio resilience and risk management.

Q: LET’S DISCUSS THE LONGER TERM.
WE RECENTLY PUBLISHED OUR SECULAROUTLOOK, ‘YIELD ADVANTAGE.’ WHAT IS THE
YIELD ADVANTAGE, AND WHAT DOES IT MEAN
FOR PORTFOLIOS?
Ivascyn: As investors, it’s important to tune out thenoise, look beyond the short term, and assess valuation.
Following that approach, we see compelling value in fixedincome, and the opportunity to take advantage of a highquality global opportunity set that also offers liquidity anddefensive characteristics.

We have been utilizing the strategy’s full global opportunity set,looking outside the U.S. for sources of resilience, the ability to
reduce overall portfolio volatility, and ability to target greater
incremental yields in parts of the world where the fiscal pictureis stronger than in the U.S.

Q: COULD YOU ELABORATE ON INTEREST RATEEXPOSURE IN THE PORTFOLIO, INCLUDINGRELATIVE VALUE ACROSS REGIONS?
Ivascyn: After substantial volatility in the last few quarters,
we’ve returned to a more neutral stance on interest rate risk,

For the Income Strategy, given starting yields today and thegenerally close to the midpoint of where we can operate, which

potential to generate return going forward, we believe it bodes

tends to be a bit more defensive than passive alternatives.

well for future returns over the next three to five years. Several
major central banks have already cut rates, with the Fedvery likely to follow this year, providing a great opportunity topotentially lock in those yields for some time. And we don’t

We’ve also used this opportunity to diversify our positions
into high quality interest rate markets outside the U.S. In manyof these economies, the central bank policy transmission
mechanism into the economy is arguably stronger – in large

AUGUST 2024

3

part because consumers tend to feel the pain (or relief) from

Also, the regulatory regime in the wake of the global financial

rising (or falling) rates much more quickly than U.S. consumers,

crisis (GFC) requires tight documentation for non-agency

where 30-year fixed-rate mortgages have been the norm for

mortgage-backed securities, which helps closely aligndecades. Over the last several months, we’ve added someincentives between the underlying investments and investors.

interest rate risk in the U.K. and Australia.

Memories are long when it comes to all the pain theseWe broadly agree with current market expectations for central
bank cuts over the cyclical horizon, but pricing may even be a
bit conservative looking a couple of years out. In light of thispricing, plus a bit of mindfulness around the fiscal picture in the
U.S. and some other developed economies (and related market
perceptions on sovereign debt), we generally concentrate ourinterest rate exposure in intermediate maturities: The three- to
five-year part of the curve looks quite attractive.

Q: LET’S DISCUSS SECURITIZED MARKETS,
AN IMPORTANT AREA FOR THE INCOME
STRATEGY. WHAT ARE YOUR VIEWS ON AGENCY
MORTGAGE-BACKED SECURITIES, AS WELL AS
NON-AGENCY MORTGAGES?
Ivascyn: Several dynamics have been in play for agency
mortgages. Curves are inverted, interest rate volatility has

sectors caused during the GFC, and rating agencies continue
to be conservative. And we can look to pick up incremental
structural return to compensate for the relative complexityof these investments without taking on material additional
credit risk. Non-agency mortgages are a key focus for the
Income Strategy.

Q: HOW IS THE PORTFOLIO POSITIONED IN
CORPORATE CREDIT TODAY?
Ivascyn: We see generic corporate credit trading fairly tight
today. We’ve lowered our exposures in the last few quarters,
staying in higher-quality, more liquid positions. We also
diversify across developed and emerging market credit,
but we’ve trimmed some of our emerging market exposure
recently as part of an overall more defensive profile, notbecause we don’t like emerging markets.

been high, and the Federal Reserve has been selling agency

High yield spreads are tight, but high yield fundamentals

mortgage securities. Banks, particularly regional banks,

appear reasonably strong, benefiting from the excess that’s

another participant in the agency market, have been in a fragile

developed in the loan space and the private credit space. We

capital and liquidity condition, so they have been buying less or

focus on more senior structures in our high yield positions.

even selling mortgages into the market. All of this has createdtypical U.S. agency mortgage today is wider than the spreads

Q: HOW WOULD YOU SUM UP THE OUTLOOK FOR
MARKETS AND FOR OUR INCOME STRATEGY?

we see in investment grade corporates. So in the Income

Ivascyn: A key element of generating returns is to thoughtfully

an unusual and very intriguing situation: The spread on aStrategy, we went from minimal agency mortgage exposure a
few years ago (when the Fed essentially was buying them all)to a significant position of late.
We have also focused on seasoned mortgage risk that isn’t
guaranteed by the U.S. government, or non-agency mortgagebacked securities. We have found attractive opportunities overthe last several months through bank dispositions, both here in
the U.S. and across Europe.
In general, these non-agency mortgage pools tend to be very
low-leverage structures, representing groups of borrowers who
have been in their homes as long as 15 or 20 years now, likely
benefiting from rising home prices. These borrowers aren’t
likely to default even if we see a big shock to the economy orhousing markets – which we don’t expect – so the credit risk isrelatively low, in our view.

respond to unanticipated market volatility, such as what
we’ve seen this month. We have a consequential election thisyear in the U.S., and there has been significant election andgeopolitical uncertainty all over the world so far this year.
Markets remain fixated on any signals in the macro data,
contributing to potential volatility. In addition, we are witnessing
market disruption from artificial intelligence and other forms oftechnological innovation.
The approach of the Income Strategy in this environment is to
not only generate a responsible and attractive yield, but also
position the portfolio with sufficient liquidity and quality tostand ready for what could be some very interesting quarters
across financial markets.

4

AUGUST 2024

Past performance is not a guarantee or a reliable indicator of future results.
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies
are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bondprices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased
market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated
and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.
Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to themarket’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors
will meet their obligations. References to Agency and non-agency mortgage-backed securities refer to mortgages issued in the United States. U.S. agency mortgagebacked securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. Securities issued by Freddie Mac (FHLMC) andFannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government.
High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity
risk than portfolios that do not. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives may involvecertain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing inderivatives could lose more than the amount invested. Management risk is the risk that the investment techniques and risk analyses applied by an investment manager
will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection withmanaging the strategy.
There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability
to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.
This material contains the current opinions of the manager and such opinions are subject to change without notice. This material is distributed for informational
purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained
herein has been obtained from sources believed to be reliable, but not guaranteed.

pimco.com

PC617_ 4735664

CMR2024-0729-3752528

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own
financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where
unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States
Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by
the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors,
who should not rely on this communication but contact their financial adviser. Since PIMCO Europe Ltd services and products are provided exclusively to professional
clients, the appropriateness of such is always affirmed. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO EuropeGmbH Italian Branch (Company No. 10005170963, via Turati nn. 25/27 (angolo via Cavalieri n. 4), 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company
No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK),
PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch(Company No. 918745621 R.C.S. Paris, 50–52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory
Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The
Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società ela Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of
Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments)
Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacionaldel Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained inTile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque deFrance (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under thesurveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities
Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. According to Art. 56 of Regulation (EU) 565/2017, aninvestment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with therelevant investment services or transactions. Since PIMCO Europe GMBH services and products are provided exclusively to professional clients, the appropriateness ofsuch is always affirmed. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002,
Switzerland). According to the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), an investment company is entitled to assume that professional clients
possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO (Schweiz)GmbH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. The services provided by PIMCO (Schweiz)GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01,
Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services
licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services andproducts is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the
Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a crossborder discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services andinvestment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited.
Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registeredwith Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL
246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision,
investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation andneeds. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from therequirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the
Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is
Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment
Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of theinvestment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts,
maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status ofinvestment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited
is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan
Tou Gu Xin Zi No. 015 . The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone
number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products
may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | Note to Readers in Colombia: This document isprovided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta delos negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil:
PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This
document may be provided through the representative office of PIMCO Global Advisors LLC AVENIDA CORRIENTES, 299, Buenos Aires, Argentina. | No part of thispublication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz AssetManagement of America LLC in the United States and throughout the world. ©2024, PIMCO.