Pimco favors stable global bonds amid rising recession risk

Rising potential for a US recession has Pacific Investment Management Co. touting the attractiveness of “stable sources of returns” in global bonds. 

The bond manager is warning that President Donald Trump’s aggressive trade, cost-cutting and immigration policies stand to slow the world’s biggest economy by more than previously expected, hurting the labor market and supporting its view for investors to tilt their portfolios toward safer assets. 

There’s “a strong case to diversify away from highly priced US equities into a broader mix of global, high quality bonds,” economist Tiffany Wilding and chief investment officer for global fixed income Andrew Balls wrote in a note. Markets “are in the early stages of a multiyear period in which fixed income can outperform equities while offering a more favorable risk-adjusted profile.”

US Treasuries outperformed stocks, advancing by 2.9% while the equity benchmark S&P 500 fell 4.6% in the first quarter. The 10-year Treasury yield currently sits in the middle of Pimco’s “expected cyclical range of 3.75%–4.75%” at around 4.15% and the firm said the higher recession risk means yields could go lower if markets start pricing in more interest-rate cuts.

So far, the asset manager’s predictions have paid off. Pimco’s $180 billion Income Fund has generated a gain of 3.3% this year, beating 96% of rivals and is the world’s largest actively managed bond fund. 

The Newport Beach, California-based firm’s latest outlook favors diversifying across global bond markets, led by having more interest rate exposure to the UK and Australia. Pimco views having longer-dated rate exposure to Europe “as less attractive, given fiscal pressures,” and “expect yield curves to steepen across eurozone markets.” 

With the 10-year German bund trading around 2.70%, Pimco revised higher the “expected range” for the benchmark “to 2.5%–3.5% from 2%–3%, indicating potential for further repricing.”

At the beginning of this year, the bond manager noted that the market uncertainty would help bolster returns. Last month, Pimco’s Daniel Ivascyn reiterated that prediction. They called for more interest-rate exposure in the five- to 10-year maturity range.

Treasury yields peaked in mid-January with the five-year climbing to 4.6% and the 10-year reaching 4.8%. Intermediate-dated yields have tumbled some 60 basis points amid signs of weaker consumer and business sentiment due to tariffs, and sliding equity markets have bolstered Treasuries as a haven for multiasset portfolios.

Pimco offers other points of consideration for investors over the next six to 12 months: 

• “Historically, starting bond yields correlate very closely with five-year forward returns,” and currently “Yields on high quality bond portfolios are 4.73% based on the Bloomberg US Aggregate Index, and 4.88% based on the Global Aggregate Index (US dollar hedged).”
• The Federal Reserve is expected “to cut rates by another 50 bps later this year,” and the central bank “is in a tricky spot, as higher inflation and lower growth risks have contrasting implications” in terms of its “price stability and full employment goals.”
• “Expect 50–100 basis points of additional rate cuts across DM economies over the rest of 2025. The Bank of Japan remains an outlier and is likely to raise rates in the face of elevated inflation expectations.”
• In emerging markets, they “see value in local currency opportunities that could benefit from capital flows being redirected from the US, as well as in hard dollar spreads where investment grade credit is increasingly available.”
• “Favor carefully managed foreign exchange positions, to generate income outside of the US while seeking to minimize correlations to the US dollar or equity markets.”