Deep Dive
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There's no business like small business. Hiscox Small Business Insurance. Bloomberg Audio Studios. Podcasts, radio, news. 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 year zone. It's a tall...
Get this, unpredictable U.S. policy furnishing the appeal of high-quality bonds, at least compared to equities as well as to corporate debt. And so far, that bet has paid off. You see that in the returns in the bond market relative to equities. For a closer view of that market and the signals it may be sending, please say that Manny Roman joins us right now, CEO of PIMCO. Great to have you, Manny. Thank you for having me. Market disruptions, 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 PEOPLE HAD MADE THE ASSUMPTION THAT THERE'D BE A VERY QUICK RESOLUTION TO THE TARIFF QUESTION.
And the reality is there's a lot we don't know, but that tariffs are going to be high and that we're going to have to deal with it for a long time. And that we'll need to readjust our 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, Mexico, Canada. So you basically run simulation and say, if this happens,
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 the foreseeable future. And we'll have to deal with this. Manny, once we know what the terms are, does 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 companies
We'll have to re-engineer the supply chain and optimize the production costs and the transfer 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 bit about what you are seeing in terms of flow as it's on. I think you've seen enormous volatility in the equity market. Right. And
Somehow, I would say we're surprised that the equity market has bounced back to the Liberation Day level, but you've seen clearly a move to cash. Our world, which is the bond world, has been pretty much unaffected. And my partner, Dan Iverson, has...
They say where you look at the yield on a portfolio of bonds, say 6%, 6.5%, it's a very good predictor of what your return will be over the next five years. So if you want to own bonds, you're going to make 6.5% give or take over the next five years. How are you going to get there?
A lot of uncertainty. Well, that's what I'm curious 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 extent. So...
There's two components to it. What we like about volatility is the fact that it will provide investment opportunity and a source of alpha in terms of trading different part of the curve, but also different product, and to move away from the US and find opportunity in other part of the world.
You can always buy U.S. assets, but you can also buy non-U.S. assets as a way to get duration and hedge them back into dollars. So, for example, we like Australian duration. Australia has a very robust economy. We like Australian bonds, but we hedge them back into dollars. That's a way to add alpha to the portfolio. Complicated.
Is it to do that when there's also a ton of volatility in the FX space and no one seems to know where the dollars might be going? You may wonder what the 2,000 people we have in Newport Beach do. That's what they do. You know, we could deal with that. Just about. Fair enough, fair enough. We could deal with that. Listen, U.S. Secretary of Treasury Scott Besson obviously really kicking off Milken on Monday. And he talked about the importance of watching the 10-year. Do you agree in terms of U.S. treasuries?
The cost of borrowing is very important and I think I will answer this in two-fold. One, the US dollar as a reserve currency is really important and the 10-year bond is in a way the parameter for the financial health of the world economy. So it is really important. Now, I would say you look at the whole year curve. You look at the short end, the 10-year, the 30-year. You think also about credit spread. They're very tight.
And you think about all of these parameters and try to assess what's to come and how you're going to deal with it. Mani, one thing I'm curious about, in bringing up Secretary Bessette, what is the voice that you listen to most in trying to determine ultimately what happens in the U.S., especially when it comes to its financial system and the importance of, you know, it's been the place, the world's safe haven, right?
That's incredible. And it will remain the place of safe haven. You'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 by an enormous factor. And yes, you can make a reasonable argument that the dollar is slightly expensive and that you may want to diversify from the dollar to other currencies.
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 is 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 ear 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. 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 reacts in such a way that people need to adjust their course 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 supply and demand and also reaction to events 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 this being the most liquid market, this is kind of the reserve currency, and that's not going to end. Will it lessen to a degree? Because when we look at our treasury market and we think about how many global investors hold our bonds...
All the rumors that maybe certain nations might be willing to weaponize their holdings if the dispute with the U.S. over trade escalates. Does that concern you? You know, there's no free lunch. The reason why people own U.S. dollar is because they like to own U.S. 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 there's about a trillion dollars of U.S. debt held by a Japanese institution, it's a good place to be, even hedge back in yen. And I think that's really an important fact to remember in terms of the flow of funds and who needs to put money where.
Is the Treasury market healthy right now? Totally. You weren't concerned at all about what transpired that first week of April?
about a potential gum up in the system or that mismatch between buyers and sellers? No, we, on the contrary, I think we've seen very liquid market, both in treasury and in credits. And to be honest, you know, markets have been remarkably well behaved. We had a couple of difficult days during COVID before the Fed intervened, but it's been very with selling since. And
You know, the markets offer plenty of opportunity to change your mind. One of the good contributions has been ETF, where ETF have allowed people like us to do portfolio trade, to rebalance our book, and to use this liquidity to move assets around. And I would really emphasize this. The markets are quite liquid. I promise not all my questions are pessimistic, but I do have one more. No, no, I am.
With regard, I mean, you had a market that had to deal with the trade issues. That hasn't been resolved, but they certainly made some degree of peace with where we are. There's now a big budget battle that's about to take place in Washington. And I do wonder, as the leader of the biggest bond company, bond investor out there, is there concern that our fiscal deficit and the potential remedies that are being discussed in Congress could exasperate the situation in the fixed income markets?
That's the wonder of being the reserve currency. Everything else being equal, you can run a slightly higher deficit than you would otherwise. And I think that, of course, people will look at the amount of deficit and it is overwhelmingly likely that the deficit is not going to get reduced. But once again...
Would you rather own very high quality assets 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 fiscal 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 U.S. being the market in the world. So, like, should we just accept it? No, I think I would reply with a quote that I heard Janet Yellen give in a private conversation. She said, all we can say...
is it's not a problem until it becomes a problem. And so... But 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 issuer lose credibility or because the policy doesn't make sense to market participants, 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. When we had the disconnect between the equity markets selling off a bunch, we saw yields 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 due. 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 a worse possible situation. We're going to get into stagflation. Right. And in a case of stagflation, I can remember 73 and 74. Now, there were real macro reasons with an oil shock.
But stagflation is a real ugly problem because everything goes down. There's no place to hide except cash. And even cash, because of inflation, you lose money. And I think you sort of price off gold
reacting to this. And so if you use my frame of mind, then I think it sort of makes sense. It's not a pretty picture. And I think the market corrected pretty quickly and said, you know what? Stagflation is by far not the most likely scenario, but the odds of a recession must be slightly above 50. Do you agree stagflation not likely? Yes.
You agree it's not likely. It's not likely. Got it. And I think stagflation is the nightmare of all central bankers. 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 market cycle. Yeah. And, you know, I remember, for example, the 91-92 crisis with the SNL. You know, we had the Milken Conference. You know, people had bought a lot of...
I yield debt and some of it had to sell. So you remember that. You try not to make the same mistake. You remember 1998, you remember 2001 and 2002. And of course, you 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, etc.,
Are they in conflict with each other or are they complementing 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 50%. If that's the case, you don't want to own...
high yield credit and you probably don't want to own direct lending. Why? Because the company are leveraged, 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 in making those decisions, I mean, you referenced just a second ago about all the folks who have to figure out where the dollar is going to go.
I assume that there's got to be a big technological component to that. When you took over back in 2016, you made a big push to add more technology resources to what you guys do. And given what's transpired over the last few years with AI and the newfound interest in that space, I'm wondering how much of that has become a component of the analysis and decision-making process. A 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 AI 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 decision, 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, it's location, it's conversation with the mortgage broker. And so you get an edge because you have an ability to crunch through an enormous amount of data and get to another granular level of decision that our human brain would need longer to be able to do.
These would go pretty quickly. I'm just going to tell you. He's very fast. He's very, very fast. Manny, so thoughtful, so helpful. Thank you so much for us and for our audience. Really appreciate it. Manny Robin, the PIMCO CEO. Switch to Verizon Business and get more from your internet without paying more for your internet. Get LTE Business Internet starting at $39 a month when paired with select business mobile plans. That's unlimited data.
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