PIMCO anticipates equity-like returns despite the steep declines in yield

Bond investors could still earn equity-like returns in 2024, despite bond yields falling sharply from last year's highs, says Pacific Investment Management Company (PIMCO). The firm believes the recent rally in bonds will continue over the next six to 12 months, but not extended in a way that would warrant increasing exposure to interest rates, as they recommended in October. 

Global yields are "back in line with our expected ranges," with inflation and growth risks "more symmetrical," economist Tiffany Wilding and chief investment officer for global fixed income Andrew Balls write. "At this point, we don"t see duration extension as a compelling tactical trade". 

PIMCO anticipates "a downward shift toward stagnation or mild contraction" this year, with the US faring better than Australia, the UK, and the euro-zone, whose economies are more interest-rate sensitive. If the current economic conditions persist, bonds are likely to earn returns similar to equities based on current initial yield levels, PIMCO says. "If current economic conditions persist, bonds have the potential to earn equity-like returns based on today"s starting yield levels," the report says.

PIMCO expects the Fed to begin cutting rates in the middle of this year and eventually bring them back to or slightly above pre-2020 levels. However, the firm also said it is too early to declare a victory over inflation, which could rise again due to "the recent market-based easing of financial conditions" and the strong performance of the consumer and corporate sectors.

If the Fed starts cutting interest rates, yields on nearly $6 trillion in money market funds could fall quickly, the firm said, and investors risk "missing out by holding cash too long while trying to time a re-entry into markets."