Pimco Backs U.S. Equities While Favoring European Debt: Here’s Why
Pimco, one of the world’s largest bond managers, is shifting its strategy by cutting exposure to longer-duration U.S. Treasurys in light of an increasingly challenging deficit environment.
The global asset manager, with approximately $2 trillion in assets under management, outlined its rationale in a recent client update. Pimco noted that inflation, economic growth, government policies, and the surge in Treasury issuance to finance the U.S. deficit could exert upward pressure on longer-term yields.
“We have been reducing allocations to longer-dated bonds, which we find relatively less attractive,” said Marc Seidner, CIO of nontraditional strategies, and Pramol Dhawan, portfolio manager at Pimco.
The duo suggested that the cumulative actions of investors demanding higher returns to compensate for risks could mimic the historical role of “bond vigilantes,” indirectly disciplining governments. While no coordinated vigilante action is anticipated, Pimco recommends adopting a stance of “vigilance before vigilantism.”
Pimco’s Strategic Shift
Pimco has turned to shorter- and intermediate-duration bonds, prioritizing higher-quality debt from both corporate and sovereign issuers. Countries like the U.K. and Australia—viewed as having stronger fiscal positions compared to the U.S.—are among their preferred choices for sovereign debt.
Moreover, the firm highlighted a unique dynamic in the U.S.: the deficit-fueled economic model has fostered a productivity and technology boom, benefiting U.S. companies and equity investors.
“Given this backdrop, we believe it makes sense to maintain equity exposure in the U.S. while preferring debt exposure in Europe,” wrote Seidner and Dhawan.
Market Snapshot
On Monday, yields on 1-month Treasury bills stood at 4.43%, while 10-year Treasury yields hovered around 4.2%, per FactSet data. Despite recent fluctuations, the 10-year yield remains significantly above its yearly low.
Meanwhile, U.S. equities have been robust, with the Dow Jones Industrial Average up roughly 18% year-to-date, the S&P 500 gaining 27%, and the Nasdaq Composite surging 31.4%.
This strategic balancing act—emphasizing U.S. equities and European debt—reflects Pimco’s nuanced approach to navigating a complex global financial landscape.
