Credit Outlook: High quality bonds offer equity-like return potential

by | Nov 16, 2023

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Hear from PIMCO experts about how investors may benefit from capturing today’s compelling yields among high-quality bonds, including investment grade credit. Explore the potential for equity-like returns with lower volatility.

We think this is an excellent time to invest in high quality bonds. We’re yielding now 6.5 to 7% on high quality fixed income investments and we see several catalysts for lower yields over the next several years.

Mark R. Kiesel: These yields now provide potential equity-like returns with the third to half the volatility of equities and with growth slowing and inflation peaking and coming down, we think the central banks are near the end of the rate hiking cycle. So investors today can lock in these yields, which we haven’t seen in 15 years.

Mohit Mittal: As Mark mentioned, it’s a quite attractive time to be adding to high quality fixed income. We saw a glimpse of that during March of this year when equities declined post-SVB, but fixed income did quite well as yields came down. We are finding opportunities across many sectors of high quality fixed income asset classes and I’ll start with the credit corporate side. So just in the corporate side, we are seeing slower growth, but we still expect nominal growth of roughly 4 to 5% this should still generate positive earnings growth. In fact, many companies are actually using this excess cash flow now to delever their balance sheets.

So for example we continue to like companies like airlines, lodging, gaming companies, aerospace and also we’ve been moving into defensive sectors recently like hospitals, pharmaceutical companies as well as towers and telecom. These companies still generate very strong cash flow, even in a lower growth environment and most of these companies are still paying down debt. So what’s really important about this is that while the government market technicals have turned negative lately with higher deficit spending, less foreign buying, we’re seeing the opposite in the corporate bond market. These higher yields are actually attracting more demand from insurance and pension funds. At the same time, we think companies will issue less bonds at these significantly higher yields, which we haven’t seen in 15 years. So that is also a further catalyst for investors to want to add to high quality corporate bonds…

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