PIMCO CEO Manny Roman Talks US Debt Levels

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We want to bring in the head of the world's biggest active bond manager, PIMCO. They began making earlier this year making a case for actually owning treasuries in that five to ten years zone as it's all get this unpredictable US policy, furnishing the appeal of high quality bonds at least compared when it's to equities as well as the corporate debt, and so far that bet is paid off. You see that in the returns in the bond market

Thank you for having me.

Market disruptions. Market perceptions have changed a lot, really in the last four months, because I felt like in January, coming into this year, people were relatively optimistic.

That's correct.

I think I think people had made the assumption that they'd be a very quick resolution to the tariff question. And the reality is there's a lot we don't know, but tariff are going to.

Be high, and.

That we're going to have to deal with it for a long time, and that will need to readdress that thinking both in terms of economic growth but also inflation.

And I think that's the real question we have to deal with.

Can you make that change now, meaning like when you have to factor in what economic growth will be, what the impact of tariffs will be, even though we don't know, how do you make that pivot now?

I think you do scenario analysis.

The big three trading partners are China and Mexico Canada, so you basically run simulation and say, if this happened, then this will be GDP, If this happened, this will be inflation, and acknowledge that we don't know what the end game is going to be, and the only thing we can reasonably say is the overwhelming likelihood is you will have high tariff for of course.

Future and we'll have to deal with this Mannie.

Once we know what the terms are, just some of the uncertainty go away and things settle down. But it's structurally a different financial dynamic potentially depending on how high those tariffs are.

I think that's right, but I think a number of company we'll have to re engineer the supply chain and optimize the production costs and the trendsfer pricing based on what the tariff will be. And I think that changing supply chain may not be as easy as what you make it to be. For us, we look at a set of macro parameters and optimize our portfolio and decide what we think is attractive in terms of asset and buy them at the best possible price.

So what does that mean for investors?

Do they just kind of stay put waiting for everything to settle, or are they starting to make those bets assuming it is going to be very different? Tell us a little about what you are seeing in terms of flow the time.

I think you've seen enormous volatility in the equity market, right and somehow I would say with surprise that the equity market has bounced back to the Liberation Day level.

But you've seen clearly a move to cash.

All world, which is the bond world, has been pretty much unaffected. And my partner Dan Iverson has to say, where you look at the year on a portfolio of bonds, say six percent, six and a half percent, it's a very good predictor of what your return will be over the next five years.

So if you want to own bones you're.

Gonna make six and a half percent, give or take over the next.

Five years, how are you going to get there? A lot of uncertainty, And that's what.

I'm curious is about the volatility. And I mean you're referring to your CIO. I mean I saw an interview where you actually talked about how he was really embracing that volatility to a certain excent.

So there's too competent to it.

What we like about volativity is the fact that it will provide investment opportunity and a source of alpha in terms of treading different part of the curve, but also different products and to move away from the US.

And find opportunity in other part of the world. So you can.

Always buy US asset, but you can also buy non US asset as a way.

To get duration and hedge them back into dollars.

So, for example, we like Australian duration Australia as a very Robert Academy. We like Australian bonds, but we hedge them back in two dollars.

That's a way to add alpha to the portfolio.

How complicated is it to do that when there's also a ton of volatility in the FC space, and no one seems to know where the dollars might be.

You may wonder what the two thousand people we have in you publish doo.

That's what they do. You know, we could deal with that. Just about that, we can deal with that. Listen.

US Secretary Treasury Scott Besson obviously really kicking off milk and on Monday, and he talked about the importance of watching the tenure.

Do you agree in terms of US treasuries.

The cost of boring is very important? And I think I will answer this in twofold one. The US dollar as a reserve currency is really important, and the ten year bond is in a way the parameter for the financial health of the world academy, so it is really important.

Now, I would say you look at the whole year.

Cove, you look at the short end, the ten year, the thirty year. You think also about credit spread they're very tight, and you think about all of this parameter and try to assess what's.

To come and how you're going to deal with it.

Manny, one thing I'm curious about, and bringing up Secretary person, what is the boy that you listen to most trying to determine ultimately what happens in the US, especially when it comes to its financial system and the importance of you know, it's been the place the world safe haven, right and it will.

Remain and it will remain, it will remain as the place of safe handy.

We're so sure why.

Well, think about it.

The US dollar is the reserve currency, but it's also the most liquid treasury market in the world.

About an enormous factor. And yes, you know, you can make.

A reasonable argument that the dollar is slightly expensive and that you may want to diversify from the dollar to other currency, but it doesn't mean, it does not mean that the dollar loses its status. And I think it's very important to keep that in mind. There's no other reserve currency, there's no other place to move trillions and trillions of dollars away from the dollar, and it is what it is.

Do you have faith in the Treasury Secretary to do the right thing, or at least get the President's here on doing the right thing, because he has said some things in regards to the Fed the Treasury secretary. Even so, I'm just curious, do you have faith?

I think the wonderful thing about financial markets is that they're.

Efficient, and so they'll tell them and that the.

Market reacts to policy, and when the market doesn't like either policies or a tweet, the market react in such a way that people need to adjust the cost of action. The market wants the FED to be independent, and I think has voted very strongly about that, and I think.

That dictates some of the choices and some of.

The noise around all of this.

And you know, it's a good thing. Markets are there.

To reflect, to reflect supply and demand and also reaction to event in the world, and we.

Saw that play out in a big way in April. One side of that, though, basically to your comments about there kind of this being the most liquid market, this is kind of the reserve currency, and that's not going

You know, there's no free launch.

The reason why people own US dollar is because they like to own US dollar asset. There is a very strong case for American exceptionalism. The fact that the financial systems are very liquid and very well run, and that if you, for example, a Japanese investor, where it's about a trillion dollars of US debt held by Japanese institution, it's a good place to be even hedge back in yen.

Is the treasury market healthy right now?

Totally? You did not.

You weren't concerned at all about what transpired that first week to April, about the potential come up in the system or that mismatch between buyers and sellers.

No.

We on the contrary, I think we've seen very liquid market voice and treasury and in credits, and to be honest, yeah, you know, markets have been remarkably well behaved. We had a couple of difficult days during COVID before they fed intervened, but.

It's been very with sailing since.

And you know, the markets offer plenty of opportunity to change your mind. One of the good contribution have been ETF where ETF have a low people like us to do portfolio, trade, rebalance or book and to use this liquidity to move assets around and and I would, I would really and fisis this The markets are quite liquid?

I promise not all my questions are pessimistic, but I do have wonder lie with the guard I mean, you had a market, they had to deal with the trade issues that hasn't been resolved, but they certainly made some

That's the that's the wonder of being the reserve currency.

Everything else being equal, you could.

Run a slightly higher deficit than you would otherwise. And I think that, of course, people will look at the amount of deficit and you know, it is all the willingly likely that.

The deficit is not going to get reduced.

But once again, would you rather own very high quality asset in the US or.

Would you rather own bonds? In Southern Europe.

You can decide which one you would rather own. That's the reality. The reality is you need to invest somewhere so.

You're not worried about it's a lot of debt. It's a physical situation. It's been a lot of debt for a long time. But now we're at levels we haven't seen and so I'm just curious, is there some point? It sounds like you're saying, well, where else are you going to go?

Right?

And it's kind of part of the us being the market in the world, So like, should we just accept it?

No?

I think I would. I would. I would reply with a quote.

That I heard Janet Yellen gave in a private conversation. She said, all we can say is it's not a problem until it becomes a problem, and so but but it's a deeper it's a deeper meaning maybe that it appears like there's a tipping point, which is very hard to guess where all of a sudden, either because the issue will lose credibility or because the policy.

Doesn't make sense to market participant. People all of a sudden don't want to be the marginal buyer.

And I think that's the analysis we constantly make in terms of what's the right level to clear the market? Man, when we.

Had the disconnect between the equity markets selling off a bunch, we saw yield spiking, right, we were trying to make sense of it, right, it just didn't seem to come together. Are you telling investors watch the bond market equity is kind of do like, how do you make sense of something like that?

Well, you could say that it did make sense because the market all of a sudden said we're going to get in the worst possible situation.

We're going to get into stackflation.

Right, and in a case of stackflation, I can remember seventy three and seventy four. Now there were real macro reason with no shock, but stackflation is a real ugly problem because everything goes down and there's no place to hide except cash, and even cash because of inflation, you lose money. And I think you saw the price of gold reacting to this, and so if you use my frame of mind, yeah, then I think it sort of

Do you agree stackflation not likely?

Yes, free, it's not likely. Okay, it's not likely, got it?

And I think stackflation is the nightmare or for central banker. Yeah, and most of them haven't seen it. You know, you have to remember that, market participants. There's only one good thing about being old is you've seen my market cycle. Yeah, and you know, I remember, for example, the night one ninety two crisis with the SNL.

You know, we had the Milken conference.

You know, people had border a lot of I yelled debt and some of it had to sell.

So you remember that. You try not to make the same mistake.

You remember nineteen ninety eight, you remember two thousand and one, in two thousand and two, and of course remember the Great Financial Crisis.

And each crisis is different, but.

You have a frame of reference where you've seen ups and downs in the financial markets.

I want to talk specifically about your business, and I mean you've got a big private business, private credit business alongside the public credit business. And we've been talking a lot over the last couple of days about how all these markets seem to be overlapping. There's sort of this Venn diagram between public markets, private markets, credit equity, et cetera. Are they in conflict with each other or are they complimenting each other.

I think they complement each other, but they may not offer the same value at every point in time. So I'll give you a very simple example. There's a reasonable case to be made that we have a probability.

Of a recession slightly above fifty percent. If that's the case, you don't want to own.

Higher credit, and you probably don't want to own derect clending. Why because the company all leverage, they are weak single B they may or may not be in the industry you want to be in.

And so if you have a recession, you'll see losses.

By the way, losses are normal, it doesn't mean there's anything wrong. But when we think of optimizing our portfolio, we find better opportunity to invest than the weaker credit at this stage of the business cycle.

And then making those decisions, I mean, you reference just a second ago about all the books you have to figure out where the dollar is going to go. I assume that there's got to be a big technological component

Very large one, And that's a very good question if you think about it. You know, what do we want?

We want great people to work for PIMCO and to stay for as long as possible, and then we want the best technology and the most innovative quant and marry the.

Two together and hope that it works.

And the EI revolution for us is the ability to manipulate a lot of data coming from very disparate sources, analyze them and get to a tool to help making decisions which is incredibly granular. So we are very very big player in mortgages. Everyone has a mortgage somewhere. We have a totally unique database. And what I mean by database is not only numbers, it's picture, its location, it's

Human brain would need a longer to be able to do as we go pretty quickly. I'm just going to tell you it's very fast.

He's very very fast, Nanny. I'm so thoughtful, so helpful. Thank you so much for asking for our audience. Really appreciate it many Reven the Pimco CEO