Pimco Expects Elevated Term Premium, Says Bonds Are Attractive

Pacific Investment Management (Pimco) expects term premiums in long-dated government bonds to remain elevated, suggesting attractive opportunities for investors to purchase these securities at higher yields, barring an unexpected economic downturn. The 30-year U.S. Treasury yield has risen to levels not seen in nearly 20 years, as underperformance at the long end steepened the yield curve and boosted the term premium. Similar trends have been observed in long-term yields in Europe, the U.K., and Japan.

Pimco's chief investment officer, Marc Seidner, and head of emerging markets portfolio management, Pramol Dhawan, assert that bonds continue to be attractive and recommend adding to bond positions if yields persistently rise, given the potential for increased income, carry, and the opportunity to benefit from a steeper yield curve.

However, the short-lived relief in Treasury yields following Treasury Secretary Scott Bessent's unexpected expansion of planned buybacks of long-dated bonds, as the U.S. national debt surpassed $40 trillion and borrowing costs surged, was soon reversed.

These developments have sparked concerns about the Treasury's debt-management strategy and its potential impact on borrowing costs. Notably, JPMorgan Chase and PGIM have warned that reduced predictability in the Treasury's strategy may ultimately lead to higher borrowing costs. Furthermore, billionaire investor Ray Dalio has cautioned that a U.S. debt crisis could be imminent, just three years away.

Pimco highlights that additional fiscal stimulus in an economy not in need of it, combined with worsening expectations for government debt supply, pose significant risks that could push yields into higher ranges. Despite the recent rise in yields, they remain only around their long-run historical averages. Seidner and Dhawan argue that today's yields only seem unusually high compared to the artificially suppressed rates during the post-global financial crisis era.

Pimco suggests that higher yields could ultimately prove beneficial for investors by generating more income. In 2022, starting yields were too low to counteract price declines as rates rose rapidly. However, today's higher inflation-adjusted starting yields may provide sufficient income to offset potential price drops, while the overall bond-market performance remains resilient.

Pimco concludes that current yield levels appear increasingly appealing by historical standards, presenting a compelling entry point for long-term investors.