Amid market turbulence triggered by conflict in the Middle East and an anticipated hawkish shift from global central banks, Pimco is advocating for investment opportunities that run counter to the prevailing market narrative. During this month's significant bond sell-off, the worst since October 2024, Pimco is leaning towards increasing exposure to interest-rate-sensitive global bonds.
As the conflict drives a surge in oil prices, the risk of resurgent inflation has prompted traders to prepare for potential interest rate hikes later this year in the UK, Europe, and the US. However, economists Tiffany Wilding and Andrew Balls, Global Chief Investment Officer for Fixed Income, argue that the energy shock increases the likelihood of "stagflation" in the economy.
They stated in a report, "Major central banks are unlikely to fully match the market's recent repricing of rate expectations," adding that the impact would be felt more directly by vulnerable households, small businesses, and credit markets. "In practice, the market's knee-jerk reaction to tighter financial conditions and more hawkish monetary policy has largely done the 'hawkish' work for policymakers," they said. "If inflation proves temporary and the economy weakens, central banks may need to pivot more aggressively towards easing."
During the sharp volatility this month, yields on US 2-year to 10-year Treasury notes rose by as much as 50 basis points, with short-term benchmark yields slightly below 4%. The 10-year yield, around 4.37%, is at the higher end of the 4% to 4.5% range it has largely maintained over the past year.
Wilding and Balls wrote, "Similar to the volatility following the US tariff announcement in April 2025, the Middle East conflict has caused markets to quickly reassess expectations for the central bank rate path, creating localized volatility and opportunities for contrarian narrative investing."
Pimco offered investors several other recommendations for the next 6 to 12 months. The firm favors a "modest overweight to duration," meaning increased exposure to interest-rate-sensitive global bonds. "Rather than assuming global outcomes are positively correlated, investors may benefit from exposures tailored to specific developed and emerging markets that offer attractive real yields and credible policy frameworks," they suggested.
The institution is positive on "US agency mortgage-backed securities (MBS), investment-grade issuers with stable and predictable cash flows, and high-quality securitized credit."
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