By Lewis Braham

High-quality bonds are on sale, and Pimco Income fund manager Daniel Ivascyn is loading up on them .

Ivascyn isn't just any ordinary manager, and the $180 billion Pimco Income is no ordinary bond fund. In the past 15 years under Ivascyn and his two co-managers' stewardship, the fund's retail share class -- PONAX -- has beaten 97% of its peers in Morningstar's Multisector Bond fund category, with a 6.3% annualized return, also dusting the popular iShares Core U.S. Aggregate Bond exchange-traded fund's $(AGG)$ 2.4%. (Pimco Income's institutional share class -- PIMIX -- has bested 99% of its peers.)

"One of the core themes that we have today is that bonds are cheap, stocks look expensive, and credit spreads are tight, so focus on higher-quality investments," he says. "Be patient and don't overly trade the market."

Today may be one of the most uncertain periods in bond market history. Treasuries, issued by the U.S. federal government, are the bedrock of our financial system, and how they behave affects every other bond. But the federal government recently has been in upheaval. President Donald Trump has been applying steep tariffs to imports, which are inflationary and bad for bonds, while firing thousands of federal workers, which could spark a recession, usually good for high-quality bonds. Meanwhile, the bond yield curve is flat, meaning long-term bonds yield about the same as short-term ones, which is highly unusual. (Bond prices move inversely to rates.)

Yet Ivascyn says that high-quality bonds are priced so cheaply now relative to stocks, which are still near all-time highs, that it's worth taking some risks. He doesn't anticipate a deep recession or inflationary spike, and has gradually been increasing the fund's average bond duration in the past five years, from a low of 0.8 year in March 2020 to a high of 4.7 years as of Jan. 31. (Duration is an indicator of a bond's interest-rate sensitivity.)

That said, Ivascyn has built a hedge into his duration exposure. "In the base case, we expect inflation to stay around these levels," he says. But "we look to find forms of inflation protection, for example in Treasury inflation-protected securities, which will benefit, at least relative to other bond investments," if inflation spikes. Pimco forecasts a 3% inflation rate overall for 2025 as a firm.

Despite this modest outlook, Ivascyn predicts one interest-rate cut this year. "We think [the Federal Reserve is] going to be very patient, and with all the uncertainty around tax policy and tariff policy, we think they're on hold," he says. Even if inflation spikes and rates go up again, the reaction "could be even worse for equity markets." Indeed, in 2022, when inflation and rates soared, the S&P 500 index was down 18%, while Ivascyn's fund lost 8%.

Yet he acknowledges that "Trump getting elected with control of both chambers of Congress has significantly increased uncertainty," he says. "What we're trying to do, and what we think the market in general is trying to do, is to understand the willingness of the Trump administration to calibrate their policy to market signals, economic data, or signals from other policymakers."

For this reason, he's been increasing the fund's overall credit quality. The fund's weighting in high-yield junk bonds with low credit ratings below BBB has shrunk from a five-year peak of 14% in 2022 to only 3% recently. Even the weighting in nonagency mortgage-backed securities $(MBS)$, a long-term favorite of Ivascyn's, has shrunk to 16% from its 24% high. Risky emerging market debt is down from a 22% high to only 6%.

In their place, Ivascyn has added significantly to higher-quality agency MBS, recently 36%, up from a five-year low weighting of 9% in 2021. Agency MBS are bundles of mortgage loans issued as securities by government-sponsored agencies like Fannie Mae. They are the highest credit quality, as opposed to riskier nonagency MBS issued by private lenders.

Ivascyn likes agency MBS today more than high-quality "investment grade" corporate bonds, which account for only 6% of the fund's portfolio, as they offer skimpier yields. He also likes high-quality asset-backed securities, or ABS -- bundled auto and other consumer loans -- up from a 7% five-year low to 13% now.

While unfazed by the political upheaval, Ivascyn urges patience. "Higher-quality fixed-income investing is not that complicated," he says. "It's especially not that complicated if you have a five-ish-year time horizon. Most of our shareholders in the strategy have a five-year or longer time horizon." He thinks such investors will get back as a return the yield on the high-quality bonds they're buying.

For the retail share class, the distribution yield is 5.6%, and 5.9% for the institutional PIMIX class, according to Pimco's website -- a safe bet if you stay the course.

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March 14, 2025 21:30 ET (01:30 GMT)

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