In the Face of Recession Risk, Pimco Favors Bonds With Stable Returns

Pacific Investment Management Co. (Pimco) is emphasizing the appeal of stable returns in global bonds as concerns about a potential U.S. recession grow.

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The bond management firm cautions that President Donald Trump’s aggressive trade, cost-cutting, and immigration policies could slow the U.S. economy more than previously expected. A weaker labor market would support Pimco’s recommendation for investors to shift their portfolios toward safer assets.

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“There is a strong case for diversifying away from expensive U.S. equities and into a mix of high-quality global bonds,” wrote economist Tiffany Wilding and Andrew Balls, Pimco’s chief investment officer for global fixed income.

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They believe markets are entering a prolonged period where fixed-income investments may outperform equities while offering a better risk-adjusted return.

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During the first quarter, U.S. Treasuries outperformed stocks, rising 2.9% as the S&P 500 declined 4.6%. The 10-year Treasury yield is currently around 4.15%, which falls within Pimco’s projected cyclical range of 3.75% to 4.75%. The firm believes that rising recession risks could push yields lower if the market starts factoring in additional interest rate cuts.

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Pimco’s strategy has already delivered strong results. The firm’s $180 billion Income Fund has returned 3.3% this year, outperforming 96% of its peers. It remains the largest actively managed bond fund globally.

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Looking ahead, Pimco advocates diversifying across global bond markets, favoring interest rate exposure in the UK and Australia. However, the firm is less optimistic about holding long-term European bonds due to fiscal pressures and expects eurozone yield curves to steepen.

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Germany’s 10-year bund is currently trading near 2.70%, prompting Pimco to adjust its expected range for the benchmark from 2%-3% to 2.5%-3.5%, signaling a potential repricing.

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At the start of the year, Pimco predicted that market uncertainty would support bond returns. In March, the firm’s chief investment officer, Daniel Ivascyn, reaffirmed this outlook, recommending increased exposure to bonds with maturities in the five- to 10-year range.

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Treasury yields reached their peak in mid-January, with the five-year hitting 4.6% and the 10-year climbing to 4.8%. Since then, intermediate-term yields have fallen by roughly 60 basis points amid signs of weaker business and consumer sentiment. This decline, coupled with equity market struggles, has boosted demand for Treasuries as a safe-haven asset in multi-asset portfolios.

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Pimco also outlined key investment themes for the next six to 12 months:

• Historically, bond yields have been strongly correlated with five-year forward returns. Currently, high-quality bond portfolios offer yields of 4.73%, based on the Bloomberg U.S. Aggregate Index, and 4.88% for the Global Aggregate Index (hedged in U.S. dollars).
• The Federal Reserve is expected to reduce interest rates by another 50 basis points later this year. However, the central bank faces a difficult balancing act, as rising inflation and slowing growth present conflicting challenges to its dual mandate of price stability and full employment.
• Across developed markets, Pimco anticipates an additional 50 to 100 basis points in rate cuts by the end of 2025. The Bank of Japan, however, is expected to raise interest rates due to persistent inflation concerns, making it an outlier among major central banks.
• In emerging markets, Pimco sees opportunities in local currency investments that could benefit from capital shifting away from the U.S. The firm also finds value in investment-grade credit within hard currency markets, as more quality options become available.
• Pimco favors carefully managed foreign exchange positions to generate income outside the U.S. while reducing exposure to the U.S. dollar and global equity markets.

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With rising recession risks and market volatility, Pimco believes high-quality bonds will remain an attractive option for investors seeking stability and strong returns.

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