PIMCO CEO Manny Roman Talks Fed Rate Cuts, Fixed Income

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We begin with a big issue on Wall Street, twenty five or fifty bonyards falling. Going into this week's finally bound at Central Bank meeting. The pim code team writing the post pandemic inflation shock at rate hiking cycle produced a generational reset in bond yields. Central banks have largely succeeded in bringing down inflation to two points somethink and a poister begin cutting rates, creating a compelling multi year outlook for global fixed income. I'm pleased to say that

Good to see you. Thank you for having me.

Put us out of our misery. Twenty five or fifty tomorrow. What's it going to Well, we're in the camp of twenty five. But you know, I always say we have a crystal ball and at the end of the day, we'll see what the market does. You know, it may very well be that it doesn't make that much of a difference. And our view is that there will be three cuts of twenty five and at the end of the day. What matters is where we are at the end of the year. Well, let's talk about the destination.

Well, I think you can say that there's less inflation right now, and that in the absence of new data, the destination will be to have lower rates, and the FED would be very data dependent, and I think I think sometimes one under estimate how careful they are about new data and how they want to be able to change their opinion. And so if you kind of use this framework, you sort of said, let's do twenty five and then let's see what we are, and then.

Probably to twenty five and twenty five.

But I think the total sum of the rate cuts may matter more than how they do it, which is.

The reason why people are looking forward and saying maybe the neutral rates three and a half percent, and oh yeah, look at that the two year right now it's about three and a half percent. Back in June, when you put out the outlook for PIMCO, there was a feeling that intermediate bonds really had a fantastic investment proposal proposition just simply because there was yield. Do they still after the rally we've seen, we still do think so.

And listen, the exciting thing about being at PIMCO right now is that fixed income is quite attractive.

And you know, we we.

We are in the business of fist and family, right so when rads are very, very low, it's harder to be that excited about fixed income. And when you can build portfolio and get a yell of six six and a half, you become very excited. And you know, we very focus on treasury, but the reality is there is a lot of value in other part of the segment.

I set back being one of them, and.

You know, we we're excited about what we see. And at the end of the day, the yield on the portfolio is a good predictor of the return that the investor experience. And so what I think is exciting about fixed income right now is you can build a portfolio and get a return of sixty six and a half percent with a serial of different instruments.

It used to be that bonds did better in bad times and worse in good times. Are we heading into a worse time where people go to bonds for safety or is this on just an absolute basis yields are higher.

My partner Dan ivested, and I'm going to calld him because because actually he has a.

Very good line.

Bonds may be the most attractive asset class. And I think that there's an absolute argument and then there's a relative argument. And I think the relative argument is to say you need to build a port for you. You need equity, you need fixed income, you need some read to state, you need.

Some private asset.

And at the end of the day, fixed income is much more attractive than equity, given the earning yield and given the evaluation of the equity market. And I think that's one of the argument for owning a larger part of fixting come. And I think when I travel the world, I think that people are under invested in fixed income and a lot of them are looking at putting more

Have you got confidence we've re established the invest correlation between bonds and stocks.

I don't know what I don't know, and I think correlation filctrate over time. I think that fixed income have a role in the portfolio construction, and I think they're there for a reason. But of course credit spread on the how you market are correlated to equity prices. So once again, I think one needs to be careful about how you frame the question and how you conclude.

Well, like I said, I mean more specific by saying to treasuries, have treasuries re established an invest correlation with equities? Because one of the reasts that we've seen established over the last few years, particularly given the central focus was inflation, is that when bombs sold off, equities did too.

That story we left that hopefully hopefully we have.

But I think remember that we also saw with the pandemic, really an unpreced edted program of none creation, which sort of through everything and our economic textbook in terms of how we thought about the correlation. And so I'm careful about what I said, because the data are just so.

Skewed in terms of what we see.

And I think, you know, you can make the argument, for example, that part of the reason why the US economy has done so much better than any other places is that the package in terms of the pandemic has been so much bigger than another country. And at the end of the day, all you can do is cross

Another way to frame this question is when you travel the world and you talk to international clients who are under invested in fixed and come in the United States, how many of them turn to you and say, what about the US deficit?

Well, my friend and partner Richard Clarida, used this very American expression and says, the US is make sure I make sure I get that right.

Car the cleanest dirty shirt. And you know.

We have debated quite a bit at or forum about deficit, and you know, deficit do matter, and they do matter, and at some point in them there's a tipping point, but we're not there. And the reality is it's a huge competitive advantage to be the reserve currency. People need to own dollars. And the reality is we don't think there's a crisis coming and that the LEVEL can and the US can have suddenly a high level of debt versus historical precedent and be able to function just fine.

When will the US get there? And do you see either party have any impetus to try to reign and spending so.

To quote my partner once again, Leady Countrill, who comes often here on the show. No, we see no impetus to try to deal with the budget deficit. The only real example we have is the United Kingdom. And I think that the United Kingdom was actually quite interesting because you saw a situation where the bond market reacted so violently to the least trust proposal that all of a sudden they had to change, and had to change really

We have a Bloomberg survey to that point that says Kamala Harris her a victory for her in the White House would be better for treasuries and worse for stocks, vice versa for the foreign president.

Would you agree with that scenario?

I think, I think there's so many unknown you know, it depends, it depends on what happened in the House.

It depends on what.

The winner can do in terms of program how this is all going to pan out. I would be very careful about making any any prognosis on this on this matter, I think, you know, when we when we think about the world, you know, I realized politics is really important. But at the end of the day, that's not how

Very big changes and very big different outcomes.

The struggle money as you notice that some dms have traded like ems over the last few years. And you mentioned the UK. So I won't put words in your mouth, I do want your views. Well, it does feel like a self imposed debt break in the United Kingdom, and I'm wondering whether from your perspective, for even the team that actually makes UK government a little bit more attractive here.

We think it's very attractive. We like the UK, We like Australia.

We think that the UK fits very well in the portfolio, and they will need to cut and cut rates significantly. And so when you think of a global outlook, the UK looks good for a fixed income.

Investor relative to the United States, say in terms of duration risk.

Relative to other countries in Europe, certainly compared to European bonds.

We also like the US.

So you know, if I want to kind of sum up things, you know, we like the U ways, we like the UK, well like Australia.

Man, I want to come back to the bond market and just talk about a dynamic. This start to really take hold over the last month or so the two year ten year segment of the yield curve. Things just starting to normalize, but the steepness almost back to double figures this morning. As we get that curve normalization. Can you walk me through how much things change in fixed income Whether you're starting to see that cash deployed a little bit more.

Well, I think there's that, And of course people kind of look at the cash they have on the sideline and there's about ten trillion dollars of money in cash where they will think to reinvested, either by extending duration or by going longer, or by taking a bit more credit risk. So there is a wall of money out there, and I keep on saying this, and of course some of it is cash corporate and will remain cash corporate.

Remains to be seen.

The other thing which I think you may find interesting is they are a lot of opportunity in relative value in the fixed inker market, and in particular think of Japan. You know, nothing happened in Japan for fifteen years, and then all of a sudden, we now have positive rates in Japan, and there's a lot of haarbitrush to be done.

How difficult is it to pry that cash out of people's cold hands, given the fact that people really do like what they're getting. And oh, by the way, there are fifteen other fund managers out there also trying to get them to pry that cash out of their hands.

Well, I will tell you competition is good. Is good for everybody. And at the end of the day, there's two things there is when the FED cuts rate, eventually the short end of the curve becomes less attractive, and I think you'll see cash moving.

And from a.

Competitive standpoint, we want to do the best possible job in terms of big and fiduciary and doing a good job in terms of performance and being there for our clients. And we compete every single day and hopefully we'll win more than we lose.

But all we can do is trial best and we try very hard.

Where's the edge, where's sort of growth concentrated in or is trying to be concentrated with respect to PIMCO in the say five years ahead.

Well, Asia has been quite exciting lately, and there's a lot of things happening in Asia, and you can sort of think of our business as being linked to GDP in terms of the saving rates and people when they save more, invest more. And so Asia has been quite exciting. And the US is an absolutely wonderful place. I mean, it's a big market and there's a lot to be done. We have a very good Canadian business, we have a very good Latin American business.

There's a lot of good things happen.

But the one variable we don't control is of course the macroeconomic situation. And so if you have a real reversal and you have, for example of a session, and let me just say it's not our scenario, but if you have a real recession, people loocome more discoversed and take some money away. And at the end of the day, you know we here for the next twenty years, not for the next twenty minutes. And so you know we have very liquid portfolio. People can take the money whenever

Sorts of reasons.

There are a number of behemoth asset managers. PIMCO overseas one point eight trillion dollars.

How much bigger could you see it getting? It's all about performance.

And I always say the great thing about not being public and not having to give quarterly earnings is you focus on what matter. The circle of truth is if you perform, they will come.

You said this last form we spoke, but it's an success by assets. We measure our success by the returns we provide. Does it disappoint you? Is it slightly upsetting that people do measure your success by assets because they've been pretty stable now for the last decade. Black rock over the same period has multiplied. Is that disappointing to you that people junctually have that.

I think we have a very different business model, and you know we were talking about Onemarth. We don't want to build waldmart Onemar is a fantastic company, but we have an opportunity set where we very carefully think about capacity and how much money we can put to work and what the right target return are for investors. And I think that by definition means that we won't be the largest asset manager and still be it when.

It comes to asset management. Private markets comes up all the time and everyone's trying to make their own push. What does Pincock fit into that big push at the moment into private markets?

So we we try to we try to focus on what we know how to do, and what we know how to do is fixed incum and so that includes as a matter of fact, everything which has to do with private market and fixed income, and it also involves real estate and there's a big realistate cycle that should be exciting. There will be pieces to pick and there will be cheap investment, both in debt and inequity and in.

The private credit market.

There's quite a unique opportunity in asset backed lending. That's where my friend Dan Iverson grew up in. We have been doing this for twenty years and the one thing which has changed, so to speak, is the banks need to free up capital and so they need to sell large portfolio of many different assets and do it fairly quickly.

That's an opportunity for us.

And so if they are good entry point and good asset to pick, we should be able to do quite well.

What types of assets are talking about? Commercial? Are you going to be on residential?

Slash all bonds? Banks?

Let me just focus first on fixed income.

You know, I think in fixed income there's a lot.

To buy, and there's a lot to buy because the banks need to deliver. And so the banks, you can think about what they have on the balance sheet. They have loans that they've given to company and they want to get rid of it and so they sell it to us, and that I think is very straightforward. In real estate, you have a real estate cycle and there

We've only got sixty seconds left with you. So the hardest question of the morning. What's more likely Arsenal winning the title or the Federal Reserve engineering a soft landing.

Arsenal winning the title also one.

Of the titles should I read into when I think about your real views on the economy?

Then, based on now you just the counsle Is that good? No? You should? You should think about Arsenal? No, I think Look, Look, I think I think people.

Are very people are very sometimes criticized the fat I think they do. They do a really really good job with a very difficult hand to play, and and and you know, they don't know what they don't know at the end of the day. And I think, I think it has been a tremendously complicated market to navigate for everybody over the past four years. None of us, none of us have so thought we would see a pandemic.

Think we we have to learn a new playbook.

It's been humbling for a soul. Money, It's good to see you and great when at the weekend. Thank you sir to appreciated money rhyme and the film cut