PIMCO's Shift in Bond Strategy

By Davide Barbuscia

NEW YORK (Reuters) – PIMCO announced on Monday its plan to diversify government bond exposure by looking beyond the United States, citing a bearish outlook on long-term U.S. government debt due to a deteriorating fiscal profile.

The $2 trillion bond-focused asset manager favors short-term and intermediate U.S. Treasuries, having reduced allocations to long-dated U.S. government debt because of potential higher inflation and increased debt issuance to manage deficits.

Marc Seidner, chief investment officer for non-traditional strategies, and Pramol Dhawan, portfolio manager, expressed their concerns in a note titled "Thoughts from the Bond Vigilantes." They noted: "We have become more hesitant to lend longer term given U.S. debt sustainability questions and potential inflation catalysts, such as tariffs and the effects of immigration restrictions on the labor force."

Last year, the so-called bond vigilantes—investors who react to government excesses by selling bonds—returned, pushing 10-year Treasury yields to 5% for the first time in 16 years due to concerns over rising U.S. debt issuance.

The increase in Treasury yields followed President-elect Donald Trump's victory in the U.S. presidential election, as investors foresaw tax cuts that might worsen government deficits reliant on debt. Protectionist trade policies were also anticipated to contribute to rising inflation and yields.

However, yields have since declined after Trump appointed Scott Bessent as U.S. Treasury Secretary, which mitigated some extreme market fears regarding overspending and aggressive tariffs. Despite this, PIMCO warned that the situation could change unexpectedly.

"Episodes of fiscal excess regularly give rise to questions about when these vigilantes might turn up," remarked PIMCO. "There is no organized group of vigilantes poised to act at a specific debt threshold; shifts in investor behavior typically occur at the margin and over time. We are already making incremental adjustments in response to rising U.S. deficits."

In addition to cutting back on long-dated U.S. Treasuries, PIMCO is investing in UK and Australian bonds due to their stronger fiscal positions. The firm also shows a preference for corporate loans in both public and private markets that are capable of enduring high-interest rates resulting from elevated government debt levels.

PIMCO acknowledged, "The U.S. remains in a unique position because the dollar is the global reserve currency and Treasuries are the global reserve asset. However, at some point, if you borrow too much, lenders may question your ability to pay it all back."