Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized

Nieves: Good morning, and good afternoon, everyone. My name is Roger Nieves. I’m joined here today by Dan Ivascyn, so it’s been quite a choppy start to the year here in 2022.

Text on screen: Roger Nieves, Senior Advisor, U.S. GWM Advisor Education

FULL PAGE GRAPHIC: TITLE – Market volatility has spiked. Subtitle: VIX Index with historical average. The chart plots the VIX index from 1990 through June 1, 2022 and shows several periods of elevated volatility (blue line), which was highest during the 2008-2009 financial crisis and at the start of the coronavirus pandemic in 2020. The red line represents the VIX Index’s historical average. Volatility increased at the beginning of 2022, although at a much lower level compared to the 2008 and 2020 spikes, and has somewhat leveled off.

What should financial advisors be telling their clients about the outlook for the economy right now?

Ivascyn: Sure. Well, you’re absolutely right, it’s been a choppy market environment and an environment with a tremendous amount of macro uncertainty. Various cross-currents.

Images on screen: COVID re-opening and shipping

Covid reopening, which is a positive scenario for the economy, but it’s leading to some pressure on prices given existing supply bottlenecks.

Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer

And although we anticipated a lot of volatility this year, didn’t anticipate war on the ground in Europe, which is quite significant, of course, both in terms of more base case scenarios but also the type of more extreme uncertainty that that now creates across the global economy, particularly in Europe.

But with bombs falling and risks around NATO engagement and expansion of the conflict, it’s really, really challenging for investors who of course are dealing with a high inflationary environment as well.

So I think the bottom line from an investment perspective is to have a healthy degree of humility, realize there’s going to be a lot of volatility, a lot of uncertainty, and just be careful in sizing positions, be careful about being too overconfident regarding markets.

Any time you have this uncertainty and central banks tightening policies as opposed to loosening policy, you can have significant overshooting, and that can be a great opportunity for the patient investor, but it can be a quite troubling time if you are overconfident, if you’re taking excess risk relative to your own personal financial goals.

This is an environment that can create some damage. So bottom line, we expect more uncertainty, more volatility. That’s great from an active asset management perspective, but you also need to respect the fact that things could get a lot worse before they get better, both on the inflation front and then even some concerns around economic growth.

FULL PAGE GRAPHIC: TITLE – Starting yields across asset classes. Subtitle: Today yields are at a much stronger starting point.  The bar chart shows yield to worst (YTW) for various fixed income sectors during two starting periods – December 31, 2021 and April 30, 2022, with YTW for all sectors higher during April 2022 compared to December 2021. YTW is a measure of the lowest possible yield that can be received on a bond. Shown from the left are Core Bonds, Agency Mortgage Backed Securities (MBS), Investment-Grade (IG) Credit, High Yield (HY) Credit, Emerging Markets (EM), Municipal Bonds, and High Yield Municipal bonds. Also shown is the year-to-date change in yields, as measured in basis points (bps), with Core Bond yields up 177 bps, Agency MBS up 181 bps, IG Credit up 192 bps, HY Credit up 268 bps, EM up 194 bps, Munis up 353 bps, and HY Munis up 334 bps.

But valuations are looking more interesting, and finally, we have some yield and some spread to get a little bit excited about.

But it will be a choppy market environment certainly going into year end.

Nieves: So yields are better, as you were saying, and hopefully bonds are still in a really good position to provide that capital preservation in investor portfolios. And then the

FULL PAGE GRAPHIC: TITLE – Investors reacting to markets: money in motion. The pie chart depicts the share of various asset classes, with stocks taking the biggest share, followed by non-U.S., bonds, cash and alternatives.

benefit that we often speak to Financial Advisors about is diversification to equities, right. which struggled a little bit earlier in the year but more recently, we’ve started to see a little bit of that diversification come back into the bond market.

Do you think that bonds are still well positioned to be that diversifying force in the 60-40 portfolio?

We know a lot of advisors have been receiving emails that say the 60-40 portfolio is dead, but that may not necessarily be the case.

Ivascyn: Yeah, so we don't believe 60-40 is dead. But your specific question of the role of fixed income as a diversifier over the next few months is a tough one to answer. There’s a lot of uncertainty there. But you’re absolutely right,

FULL PAGE GRAPHIC: TITLE – Two-year and five-year yields have increased. The line chart plots the 2-year U.S. Treasury yield (blue line), the 5-year U.S. Treasury yield (green line) and the federal funds rate (upper bound, red line) from March 2015 through March 2022. The 2-year and 5-year yields rose significantly from their lowest levels in March 2020. As of March 31, 2022, the two-year and five-year yields were close to reaching their highest levels since around September 2018.

it appears that rates have gone up fast enough and to a level now where you’re beginning to see people becoming more concerned about a recession, more concerned about equity valuations, equity earnings, so you have seen the scenario when stocks have gone down, bond prices have gone higher.

So we do expect to get back to that more traditional relationship soon. And I’ll define soon as over the next year or so. It can happen sooner than that, because there is this great struggle between the real economy and the financial economy.

And we’ve seen prior economic slowdowns be driven by weakness in risk assets, and we very well could see further weakness that leads to further tightening of financial conditions to slow the economy on its own.

But now that inflationary risks are the primary risks people are focusing on, and you get more concerning high inflationary prints, you could quickly swing back to that bad correlation environment that we’ve been in for much of the last few quarters, where stocks sell off, bonds sell off, and that’s where, again, the traditional 60-40 doesn’t of course work well under that scenario.

So this is, again, a journey towards a time when inflation gets back within reasonably acceptable ranges for central banks. We as a firm are fairly confident that over the course of the next year or two, we do get inflation back to more reasonable levels. And when that occurs, when other participants believe that trend is beginning to form, then I do think you’ll begin to see that more traditional correlation return where down equity days likely coincide with up bond prices or at least at a probability closer to what it was just a few years ago. But a lot of uncertainty over the short term.

Nieves: Dan, thank you very much for your time today, and thank you to all of you for joining us for our discussion.

For additional information, please visit pimco.com

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

Disclosure

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Diversification does not ensure against loss.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

The correlation of various indexes or securities against one another or against inflation is based upon data over a certain time period. These correlations may vary substantially in the future or over different time periods that can result in greater volatility.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch  (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. 2604517) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG).  The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.| PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2). The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited Unit 3638-39, Phase II Shanghai IFC, 8 Century Avenue, Pilot Free Trade Zone, Shanghai, 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other) | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (110) Jin Guan Tou Gu Xin Zi No. 020. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.). Tel: +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2022, PIMCO.

CMR2022-0531-2223983