PIMCO's Recession Signal Is "Flashing Orange"

  • Modestly underweight duration, overweight TIPS (While our base case calls for continued modest inflation, Treasury Inflation-Protected Securities (TIPS) breakevens have repriced lower, and we see TIPS as relatively attractively priced)
  • Curve: Long the belly, short the long end (We see global curve-steepening positions as a structural source of income generation and, in the current environment, have a preference for the belly of the curve versus the long end of the curve based on valuation) - also explains the recent inversion in the 2s5s and 3s5s.
  • Cautious on generic corporate credit (Credit valuations have moved closer to long-term averages, but we don’t see credit as cheap, while volatility is rising and the slowing economy could reveal underlying weaknesses in terms of leverage.)
  • Relative value in financials and MBS (We continue to see non-agency mortgages as offering a defensive alternative to investment grade (IG) credit, with a better downside risk profile in the event of weaker macro/credit market outcomes. We also see agency mortgage-backed securities (MBS) as an attractive and relatively stable source of income in our portfolios)
  • Underweight European peripheral risk (We remain cautious on European peripheral sovereign credit risk and corporate risk given the immediate challenges in Italy and the longer-term risks to the eurozone more generally in the next recession.)
  • Opportunities in EM FX and bonds (In a world in which growth is synching lower across countries, we have a balanced view on the U.S. dollar versus other G-10 currencies)
  • Equities: Focus on high-quality defensive growth (we expect downward pressure on profit growth expectations... We believe equity markets will remain volatile, favoring high-quality defensive growth and minimal exposure to cyclical equity beta. We continue to favor more profitable U.S. equity markets to the rest of the world)
  • Commodities: Modestly positive on oil  (OPEC’s recent announcement of a cut in production suggests the desire to support oil prices in the low $60s, avoiding the very low levels of 2014, but not tightening markets enough that it causes more market share losses to shale.)
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