PIMCO is reducing its exposure to long-dated U.S. Treasury bonds. According to the Allianz subsidiary, rising deficits, inflation risks and the debt dynamics in the USA call for restraint. What the asset manager relies on instead.
• Doubts about the sustainability of US debt are growing
• Customs and immigration policies under Donald Trump could make the situation even worse
• PIMCO is withdrawing from longer-term US government bonds
Global asset manager PIMCO has significantly reduced its allocation to longer-dated US government bonds. The reason for this is increasing concerns about a future worsening of the US budget deficit under US President-elect Donald Trump. As Marc Seidner, chief investment strategist for non-traditional strategies, and portfolio manager Pramol Dhawan write in a post on the PIMCO website, given the “doubts about the sustainability of US debt and possible inflation drivers such as tariffs and the impact of immigration restrictions on the Working population […] become more hesitant, [den USA] “to borrow money in the long term”.
Shifting US government bonds: Increasing deficits are becoming increasingly important when making investment decisions
As the PIMCO experts continue to write, they “have the allocation in longer-term [US-]Reduced bonds that we find comparatively less attractive” and would instead have “short and medium maturities [bevorzugen]where investors can achieve attractive returns without taking on higher interest rate risk”. If more investors adopt this strategy over a longer period of time, according to the experts, this would be investor behavior that takes on the role of a bond watchdog – in English “bond vigilantes”. This refers to investors who protest against fiscal policy that is viewed as inflationary or excessive government spending by selling bonds and thereby driving up yields, which are the opposite of Bond prices move.
The two experts also mention several times how important and worrying the rising US government deficit has become for them in their investment decisions. “While we regularly adjust allocations along the yield curve to reflect evolving views on duration and relative value, rising government debt is now playing a larger role in these decisions,” it said. The Federal Reserve also cited the sustainability of US debt as the biggest concern of survey participants in its semi-annual financial stability report in November, they emphasize.
PIMCO experts: Prefer other countries over the USA when it comes to government bonds
Instead of investing in long-term US bonds, PIMCO is now increasingly focusing on short- to medium-term bonds from high-quality companies and governments – and the latter, according to the experts, can primarily be found outside the USA. Experts at the Allianz subsidiary say that the current preference is for bond exposures in Europe, where the budget situation is less tense than in the USA. “Non-US bonds can also help hedge equity exposure in portfolios. Comparing fiscal policy, we think it makes sense to structurally short the US government sector versus the private sector, while in Europe generally the opposite is the case,” write Seidner and Dhawan.
When it comes to stocks, however, it makes sense to continue to rely on the US market, because even if the USA is in an “unknown deficit area”, it can still grow. “The US social contract – growth financed by high deficits – has triggered a productivity and technology boom from which US companies and stock investors are benefiting,” said the experts. In Europe, however, “growth momentum has stalled and fiscal responses remain limited.” Thus, the US stock market continues to offer growth opportunities that are hard to find elsewhere – even though “debt and deficit levels are high and likely to continue to rise even in today’s strong economy.”
PIMCO with dark forebodings for the future
At the moment, no one can say how long the US debt will be sustainable. However, the two PIMCO experts warn that this may not be the case forever – even if the USA has some kind of special global role: “The USA continues to be in a unique position, as the dollar is the global reserve currency and government bonds are the global reserve assets But if you borrow too much, lenders will eventually question your ability to pay it all back [Anleihen-]Be a watchman to recognize this.”
Editorial team finanzen.net
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