Prepare for lackluster inflation, warns PIMCO’s top investor


Last month, the United States recorded its biggest surge in inflation since 2008 with an annual increase of 4.2 percent in April. In Australia, consumer prices rose 0.6% in the March quarter, below analysts’ expectations, but a wave of anecdotal evidence strained investors.

“As a result of this significant and uneven reopening of the global economy, there are going to be significant imbalances between supply and demand. In fact, the most recent inflationary pressures have occurred in areas that we are quite confident will be transient, ”he said.

Excluding food and transportation costs, the main drivers of US inflation this year are airline tickets, hotel costs and used cars. These are precisely the types of areas that will take hold quickly over the next few quarters as the economy begins to take its pre-pandemic shape.

In March, PIMCO warned that an inflation “headache” could sweep the market, off-putting investors but also offering a chance to buy assets like government bonds.

“This headache could be pretty serious later this year,” Mr. Ivascyn said. “Perhaps you could end up with a more attractive entry point later this year because of this uncertainty around inflation.”

Powerful forces that have helped keep inflation under control for years, such as the increasing use of technology, the slowing labor market and the aging of the population, will also help to curb soaring price increases, a- he declared.

“We believe that over the next few years these engines will re-exercise and continue to remove pricing power,” he said.

Mr Ivascyn took on the role of lead investor at PIMCO in 2014 from Bill Gross, the king of bonds who founded the fixed-income giant in the 1960s, but quit after a bitter feud with the company.

Inflation is one of the biggest risks for fixed income investors, as rising prices erode the value of future income, which usually hurts bond prices.

Fixed income investors are also grappling with central bank policy which has brought interest rates down to near zero in the United States and Australia and injected billions of dollars into financial markets through the quantitative easing.

This weighed on safe government bond yields, forcing investors to look to riskier areas of debt markets to lead fixed income portfolios.

One area PIMCO is optimistic about for performance is the debt of the companies hardest hit by the pandemic which will begin to benefit as economies reopen, aided by the rollout of vaccines.

Airlines and casino companies are two areas the fund manager is targeting in absolute return portfolios, he said.

Well-known value investor Jeremy Grantham on Wednesday described the burgeoning rally in safe government debt, which pushed government debt yields in Japan and Europe into negative territory.

“The bond market is the highest in human history,” Grantham, co-founder of GMO, the Boston-based fund manager, told a conference Wednesday.

“More than a quarter of sovereign debt will charge you for the privilege of buying their bonds. They won’t pay you, you will pay them, ”he said. “It’s amazing.”


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