Prospects for investing in bonds look good, says Pimco's strategist

Well, we've seen the yield rise on the 10-year by 100 basis points now, after they had fallen from the peak of near 5 percent about a year and three months ago. To us, at PIMCO, it represents a second bite at the apple, because when yields had plunged, many investors were worried, perhaps, that they had stayed in cash for too long. So now, with yields up near a percentage point, the prospects for investing in bonds look very good. There'll be many doubters, of course. There's always a worry when yields are rising, because, of course, that means prices are falling. There's a concern, of course, about the potential for more inflation, or re-acceleration in inflation. But we think some of those fears are unfounded, and, in fact, in the price. And so we wouldn't worry too much about conditions. And one thing, quickly, to mention, the bond market in the United States and worldwide is priced for the Fed to lower its policy rate eventually to 4 percent, roughly 4 percent. And to keep it there, and this is the important point, the rest of the decade. This is a way of saying that when you're investing in bonds today, you're getting the defensive properties of fixed income for free. If you believe that somewhere in the next five years, something adverse will happen that causes the Fed to have to put its policy rate lower than that 4 percent, which, of course, would mean price gains. So when looking at the equity market worldwide, credit spreads worldwide, you see the markets are priced for perfection, in a way, what people call a so-called Goldilocks scenario. That creates risk for those who are in those instruments. And so it's probably better to be thinking about balancing a portfolio with fixed income today because you're getting paid to do so. And the so-called inverse correlation when stock prices fall, bond prices rise, we think has returned. And that can be a great thing for investing in bonds today. And so we'd be very careful about looking at stretch valuations and embracing them. Is this the time to go long duration or not yet? Yes, at PIMCO, we're slightly overweight on duration. Of course, one idea is to perhaps be careful about catching a falling knife and bond prices are falling lately. But you do want to say don't catch the falling knife, but do catch these yields while you can and do something because we do think that there's potential for yields to eventually decline. So we want to be careful about scaling. So if so, for those who are leery, those who are worried about falling prices and rising yields, perhaps do something because the fool's game of staying in cash evaporates eventually if you believe the Federal Reserve will be successful. That's one final point on this. There's an adage, don't fight the Fed, which is a time-worn adage that has worked for investors for decades. Don't fight the Fed may mean to some, run for the hills because we're worried that the Fed won't cut rates as much. In fact, the bond market thinks the Fed will cut its policy rate by only three-eighths of a point in 2025. But don't fight the Fed today means having confidence in the institution. It's built up credibility over 40 years in its ability to affect the inflation rate. So if it is ultimately successful, and it may mean tough love by cutting rates less than markets think, and that's the way it's been progressing, that can be a great thing for bond investors because it will stifle inflation, which is the bond market's nemesis.