Pimco eyes local-currency bond markets in Asia
Asset manager to explore high-yielding sectors in China amid US downturn
Pimco, one of the world’s biggest asset managers overseeing assets worth US$2 trillion, sees opportunities in Asia’s local-currency bond markets amid an economic downturn in the United States, although geopolitical uncertainties and concerns about moderating growth in China are risks that cloud this outlook.
The US Federal Reserve’s policy tightening and the recent banking-sector crisis were weighing on America’s economy, which was staring at a possible recession next year, Daniel Ivascyn, Pimco’s chief investment officer, said in an interview with the Post.
The US regional banks’ crisis was not over yet, with the protracted debate over the debt ceiling adding more complexity to the situation, he said.
“We’re not expecting the type of economic shock that we witnessed during the global financial crisis or during Covid-19, but a more moderate and extended, multi-quarter recession,” Ivascyn said. “But you certainly need to prepare investment portfolios for something worse.”
China remained one of the last few markets globally without an inflation problem, which meant there was room for monetary easing to fend off an economic slowdown, Ivascyn said. Bond prices, which move inversely to yields, rise when interest rates are lowered, as the declining yield on new issues makes previously issued bonds more appealing.
“China has a decent amount of growth momentum,” he said. “We think China’s growth prospects look fairly strong over the near term.”
Ivascyn, 53, correctly forecast a recovery in mortgage-backed securities after issuance plunged in the wake of the 2008 financial crisis. He replaced “bond king” Bill Gross to become the company’s chief investment officer in 2014, and currently oversees more than US$300 billion in total assets.
The US$120 billion Pimco Income Fund, the world’s largest actively managed bond fund, has returned an average 3.4 per cent annually over the past decade, according to Bloomberg data. That ranks the fund in the top 3 percentile of 220 funds with assets worth at least US$1 billion.
Ivascyn’s view of China, however, is not shared by his peers, many of whom are getting frustrated with a softer-than-expected recovery in the world’s second-largest economy. A recent survey of Asian fund managers by Bank of America shows that the number of investors bullish on China’s recovery dropped significantly to 49 per cent from 79 per cent last month.
China’s economic data last month “broadly and significantly” missed market expectations, Goldman Sachs said in a recent note to clients.
Some persistent weaknesses in key parts of the economy, such as the property sector, and issues around youth unemployment and tepid consumer confidence were weighing on the growth momentum, the US bank said.
The MSCI China Index has lost almost all of its 18 per cent rally this year, erasing US$6.5 trillion in market value from a peak on January 27. As investors sought the safety of government bonds, China’s benchmark 10-year bond yield declined by 7 basis points last month, its biggest monthly drop since October, and fell deeper to a six-month low this month. These notes yield 80 basis points less than US Treasuries.
Ivascyn said Pimco had reduced some of its exposure to higher quality Chinese bonds such as government bonds, and had taken a “significantly” more defensive position on Chinese interest rates versus the rest of the world after the outperformance.
Last year, Chinese 10-year government bonds fetched as much as 110 basis points more than their US counterparts.
“If we were to become more constructive on economic growth … we would certainly look to explore and target some of the higher-yielding sectors and segments of the China market, but also Asia more broadly,” he said.
China is unlikely to see the spectacular growth rates it has posted over the past two decades as it is now going through a middle-income transition. And the country “probably will not” see another growth engine like the property sector, which at one point accounted for half of the Asian credit bond market, to shore up the economy in the near future, he said.
Pimco’s portfolio managers are also eyeing local currency-denominated bonds from Australia, Indonesia and India, as they diversify their holdings away from US dollars.
Uncertainties such as tensions between the US and China are still some of the biggest concerns for investors. The middle-income transition that China is grappling with will stoke volatility and inject stress in certain sectors.
“But China and the rest of Asia are likely to continue to grow at rates faster than most other areas of the world,” Ivascyn said. “Their economies will grow in a relative sense … it will continue to be a reasonable source of diversification.”