Pacific Investment Management Co. is steering away from $10 trillion of government debt issued by Japan and the U.K. — and it isn’t particularly enthused about Treasuries either.
“When we look at the bond markets around the world, the most overvalued markets are in Japan and also the U.K.,” Mark Kiesel, chief investment officer for global credit at Pimco, said in an interview on Bloomberg Television. “We’re kind of neutral on U.S. interest-rate risk, while we’ve been underweight Japan, U.K. and European interest-rate risk.”
It’s not just the countries’ low yields that are deterring some investors.
In Britain, which Kiesel called “probably the richest government bond market out there,” the uncertain economic outlook resulting from the decision to leave the European Union has culminated in a snap election in June. And a weaker pound has led to higher consumer prices, which may cause the debt to lose value.
In Japan, there’s little room for bonds to rise as the central bank aims to keep the 10-year yield around zero, as part of its yield curve control policy to bolster momentum for economic recovery.
Meanwhile, Treasury yields have tumbled amid increased geopolitical risk involving North Korea and Syria, deflated expectations for fiscal stimulus and disappointing economic data.
Tax reform is likely to be “watered down and far less significant” than the market has been expecting, helping leave growth constrained around 2 percent to 2.5 percent, Kiesel said.
The Fed will be “gradually raising rates at a moderate pace,” he said. “So what this means is that we’re going to continue to see an economic expansion, but rates are going to be more range-bound in the U.S.”
As far as sovereign bond markets that Kiesel favors, Brazil and Mexico are high on the list. The firm bought Mexican government bonds after the peso weakened amid tension with the U.S. It also bought Brazil’s bonds as the central bank cuts rates amid decelerating inflation.
The $79.1 billion Pimco Income Fund has returned 9.4 percent over the past year, beating 91 percent of its peers, based on data compiled by Bloomberg.