(Bloomberg) -- Investors are adding to their fixed income exposure as imminent interest rate cuts create opportunities, according to Emmanuel Roman, chief executive officer of Pacific Investment Management Co.
Roman expects the Federal Reserve to cut rates by 25 basis points this week, and will end the year 75 basis points lower to pave the way for a buoyant period for fixed income, he said on Bloomberg TV on Monday.
“What I think is exciting about fixed income right now is you can built a portfolio and get a return of 6 to 6.5% with a mix of different instruments,” Roman said. Institutions that have been under-exposed to the asset class “are looking to adjust their allocation,” he added.
The Federal Reserve is expected to begin lowering interest rates for the first time in more than four years on Wednesday as it pursues a rare soft landing for the US economy. Some traders and economists are even preparing for a half-point move.
California-based Pimco has been touting opportunities in fixed income, and particularly high-quality and active bond strategies as central banks rate cuts get underway. Chief Investment Officer Dan Ivascyn said in an update last month that it’s positioning the Income Strategy fund in assets with sufficient liquidity to navigate market volatility, and increasing its position in mortgage-backed securities.
Roman said Pimco, one of the world’s biggest bond managers with total assets of almost $1.9 trillion, tries to focus on what it knows how to do, and it will look to leverage that in private credit and real estate, where it sees some big opportunities.
“There’s a big real estate cycle and that should be exciting and there will be cheap investment both in debt and equity,” he said, while in the private credit market there’s a unique opportunity in asset backed lending.
The firm has been wagering against some parts of private credit and plans to buy up loans if borrowers find themselves crushed by interest payments and lenders need a quick exit. The firm has been one of the loudest prophets of doom on private credit and previously said that cracks in the market could appear as early as this year.
“Banks need to sell large portfolios quickly and that’s an opportunity for us,” Roman said. “Compensation needs to be high for the risk and hopefully will be on the right side of the trade coming out of it.”
--With assistance from Jonathan Ferro, Lisa Abramowicz and Annmarie Hordern.
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