(Bloomberg) — Bond traders can’t predict what US President Donald Trump will do next, but that uncertainty can be exploited to generate strong returns, according to Pacific Investment Management Co.’s chief investment officer.
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“A little bit of volatility, a little bit of fear in markets, for us would likely be a good thing,” Daniel Ivascyn told Bloomberg News in an interview. “Volatility usually means opportunity for active managers.”
The Newport Beach, California-based asset manager is betting on five- to 10-year bonds, as they generate solid income, and are prepared to buy more if yields rise back toward 5%. Trump’s administration has moved swiftly to enact sweeping policies, which has put traders on their heels and clouded the outlook for the Federal Reserve’s next steps for monetary policy.
“The key question on everyone’s mind is the degree in which the administration’s willing to calibrate policy to the data, the market signals and feedback from other policymakers, central bankers,” said Ivascyn. “It should be a target rich environment to put money to work, but you’ve just got to be a little careful of having too high an implied conviction level.”
Ivascyn said Pimco’s $175 billion Income Fund has “a lot of liquid positions, agency mortgages, higher quality ABS, and so there’d be a scenario where if we get a pullback in credit markets, we would look to reduce some of the high quality stuff and then be more aggressive in the credit market, high yield and loans.”
That approach helped the Income Fund rally in the past three months, beating 96% of rivals. It has gained 1.3% this year, outpacing a 0.8% rise in the broad market index and 94% of rivals. Ivascyn has helmed the Income Fund since its inception in 2007.
Ivascyn said the past week provides a template for traders and how they approach markets under Trump. Fears of a tariff war between the US and its allies sent short-dated Treasury yields higher, while those on longer tenors dropped as traders worried the domestic economy would slow down.
“You’ve got to be respectful of the uncertainty here,” Ivascyn said, while being focused on staying “nimble and generate some pretty good returns.”
Pimco began this year making a case for owning Treasuries in the five to 10-year zone as it saw an unpredictable policy agenda from the new White House burnishing the appeal of high quality bonds compared to expensive equities and corporate debt.
