Pimco, a leading investment management firm, believes that the extra compensation investors demand for holding long-dated government bonds, known as the term premium, is likely to remain high unless there's an unexpected economic downturn. This elevated term premium presents attractive opportunities for investors to buy bonds at higher yields, according to Marc Seidner, CIO of non-traditional strategies, and Pramol Dhawan, head of emerging markets portfolio management. The 30-year U.S. Treasury yield has surged to levels not seen in almost two decades, with European, U.K., and Japanese long-term yields also climbing.
Pimco views bonds as attractive and recommends adding to holdings if yields continue to rise, citing the potential for increased income, carry, and the benefits of rolling down a steeper yield curve. They note that even after recent increases, yields on longer-dated Treasuries and other sovereign bonds are only around their long-run historical averages, appearing unusually high only in comparison to the suppressed rates post-global financial crisis.
Driving these higher yields are factors such as rising sovereign debt loads, a surge in AI-related corporate bond issuance, and persistent inflation concerns. The U.S. national debt recently surpassed $40 trillion, and while the Treasury Secretary expanded planned buybacks of long-dated bonds, this relief was short-lived. Key risks that could push yields even higher include additional fiscal stimulus in an economy that doesn't need it and deteriorating expectations for government debt supply. JPMorgan Chase and PGIM have also warned about potential higher borrowing costs due to less predictability in the Treasury’s debt-management strategy. However, Pimco suggests that higher yields today, coupled with attractive inflation-adjusted starting yields, can generate sufficient income to cushion against price declines, unlike in 2022 when starting yields were too low to offset rising rates.
