PIMCO – 2025 mid-year investment outlook: Global multi-sector fixed income – CIBC Diversified Fixed Income Fund

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[PIMCO – 2025 mid-year investment outlook: Global multi-sector fixed income – CIBC Diversified Fixed Income Fund]

[Featuring Prerna Gupta, Senior Vice President and Fixed Income Strategist, PIMCO]

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>> Prerna Gupta: Hi there. I'm Prerna Gupta, Senior Vice President and lead strategist for the monthly income fund at PIMCO. I'm happy to be back for the mid-year recap and investment outlook with all of you.

The first half of 2025 has been marked by continued volatility, geopolitical tensions, trade policy uncertainty and economic indicators frequently shifting sentiment in financial markets. Of course, the Fed has continued to hold interest rates steady as the US economy has generally remained strong and inflation risks have been heightened following tariff uncertainty. Intermediate us bond yields, however, have moved lower year to date, providing a tailwind for broader fixed income market performance.

Looking ahead, we continue to believe valuations in fixed income look very attractive, especially relative to equities, which remain near record highs, despite the risk to growth and inflation, in addition with cash yields continuing to decline across developed markets, we believe today is an optimal time for investors to lock in starting yields in fixed income. With this backdrop of elevated uncertainty, we think an active and flexible, multi sector Fixed Income Solution like the monthly income fund allows portfolio managers to shift exposures across markets to respond to the relative value in the current macro environment.

The PIMCO monthly income fund continues to lean into higher quality sources of yield and seek attractive income for investors, the fund has tactically increased its duration exposure to 4.9 years as of the end of May. We continue to prefer US duration, but also maintain modest long positions in other markets Like the UK and Australia, as recessionary risks remain heightened in these markets as well, we want to utilize our full global opportunity set amidst this environment, because policy paths can diverge among developed economies.

Monthly income fund also holds small diversifying allocations to select emerging market countries with relatively high quality balance sheets, ones like Peru and South Africa, for example. In addition, the portfolio has modest exposure to us tips to help protect the portfolio against rising inflation expectations. In regard to curve positioning, we have a curve steepening bias, and thus the portfolio finds the belly of the curve to be the most attractive. In terms of sector exposures, we remain focused on high quality securitized products relative to generic corporate credit agency mortgage backed securities, for example, is the fund's largest single sector allocation, as we continue to see valuations and spread there to be quite attractive.

We remain also highly constructive on non-agency mortgages as a source of high quality spread targeting senior tranches of well-seasoned deals that have embedded credit protection. We view mortgage risks as especially resilient given government guarantees on the agency mortgage backed security side and strong consumer balance sheets and high home equity values on the non-agency mortgage backed security side.

We have also emphasized exposure to AAA securitized credit across consumer and commercial, asset backed securities and CLOs. We focused on the senior most portion of the capital stack in these investments within our limited investment grade corporate exposure, we continue to like systemically important banks, ones with strong capital positions and direct support from central banks. To briefly touch on currency positions, the fund holds long exposure to a basket of predominantly higher carry em currencies versus the Canadian dollar. This provides additional diversification in the portfolio.

Overall, the PIMCO monthly income fund continues to offer an attractive yield in a very high quality portfolio. And as a reminder, we're in a portfolio that is 85% invested in investment grade rated security with fixed income starting yields historically correlated to forward returns. We believe today's yield level offers investors an opportunity to capture elevated yields that can produce attractive returns.

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