Rate Hikes and Bond Mutual Funds in 2016: PIMCO Weighs In



PIMCO on rate hikes in 2016

Tony Crescenzi from the Pacific Investment Management Company (or PIMCO) wrote in an article titled “Federal Reserve Outlook for 2016” that the company expects three rate hikes in 2016. He said that this “is consistent with where the central bank’s core leaders have indicated they are leaning.” However, Crescenzi was of the opinion that the market had factored in only two rate increases in 2016.

Richard Clarida and Andrew Balls, also from PIMCO, said the same thing in their Cyclical Outlook released in December 2015. They stated that “after December’s initial quarter-point hike, the market is pricing in only two further quarter-point increases in 2016.” They were of the view that the US Federal Reserve may hike rates more than what the market is anticipating.

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Fixed-income portfolio positioning

Clarida and Balls wrote in their report that PIMCO expects to be “duration underweight” in most of its fixed-income portfolios. By this, they mean that the duration of PIMCO’s funds will be lower than that of its respective benchmarks and other funds. This means that mutual funds such as the PIMCO Long-Term U.S. Government Fund Class A (PFGAX) and the PIMCO GNMA Fund Class A (PAGNX) will lower their durations compared to some of their peers.

Due to PIMCO’s view on inflation, which it expects to rise over the coming four quarters, it’s in favor of TIPS (Treasury Inflation-Protected Securities). Its PIMCO Inflation Response Multi-Asset Fund Class A (PZRMX) offers protection from inflation. Other mutual funds such as the Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX) provide the same protection.

PIMCO is positive on credit risk premiums, calling them “reasonable,” and adding, “Outside of the energy sector, credit fundamentals are solid, and we generally expect to add credit over the next year.”

PIMCO sees opportunities in investment-grade (PBDAX) and high-yield bonds (PHDAX). The PBDAX invests in bonds of Las Vegas Sands (LVS), Crown Castle International (CCI), Hilton Worldwide Holdings (HLT), and their subsidiaries.

From PIMCO, let’s move on to another investment manager, BlackRock, and see its views on fixed income for 2016.


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