Fixed income markets ‘indicate there’s some value for a long-term holder’: Strategist
Sonali Pier, managing director and portfolio manager at Pimco, joins Yahoo Finance Live to discuss what the latest market moves and Fed actions mean for investors.
EMILY MCCORMICK: Let's chat more about the market action as the S&P 500 heads for its fifth day of losses over the past six sessions. And for that, we have Sonali Pier, PIMCO managing director and portfolio manager here with us now. Sonali, thanks for being with us. What do you think the market is looking for to help curb this recent volatility we've been seeing?
SONALI PIER: Yes, first, thank you for having me. Certainly, volatility has been quite significant in 2022. As we look ahead, we see that with the Fed having already started hiking and soon about to embark on balance sheet unwind, that when you look at starting valuations, there's been a lot of concern around, can the Fed create a soft landing and avoid a recession?
But today's levels really indicate within fixed income markets that there's some value for a long-term holder, so meaning that if you look at today's levels, and you look at it versus, say, a 20-year history of whether that's a, call it investment grade, high quality assets, today, we're at levels that are above the median over the last 20 years. So we think there's some compelling value for a long-term holder.
RACHELLE AKUFFO: And as investors look at what we saw with CPI data came out, and then obviously followed by PPI data, how much of that is playing into their fears? And how far out do you think the markets are really pricing some of these concerns in?
SONALI PIER: Yeah, certainly. There's-- the shift in a lot of the talk around inflation has been quite significant, going from just a little over a year ago with the discussion around, what is it, transitory, and now seeing it's been much more persistent. It's, inflation has certainly become not only topical, but a real issue for the broader market, as the Fed has also increased its outlook for the number of hikes needed and the pace, although they did take 75 BIPs off the table for the next hike last time's presser.
So in terms of the effect of inflation, it's really at this point, we're going to see if the Fed raising rates, unwinding some of the balance sheet can take off some of that inflation froth because it's quite high, and it is starting to affect companies, from their ability to push through from a pricing power perspective, as well as consumers, whether that's at the gas pump or as a result of food increases and the like.
DAVE BRIGGS: So the Dow down 14%, the S&P, 19%, the NASDAQ 28% plus year to date. This glass feels half empty. What are you hearing from people at or near retirement? How do you reassure them?
SONALI PIER: Yeah, certainly, and I think that's why my comment started at the beginning around long-term horizon, is that it is difficult to look at today's year to date returns, for example. But if you look at it, the bulk of the returns have, especially in fixed income markets, have been a result of the adjustment from an interest rate perspective.
So while interest rates have gone up and it's led to lower total returns, certainly, the positive is that the yield has gone up. And so income producing assets, such as in fixed income, we're looking at high yield around 7 and 1/2%, investment grade near 4 and 1/2%. That yield, at least, will lead to better-- better yields lead to better income over time.
EMILY MCCORMICK: And if we look at the leadership within the S&P 500, even in the past week, investors are definitely getting defensive. We're seeing consumer staples, utilities really outperforming. Do you expect this leadership to continue?
SONALI PIER: Yeah, I think as the Fed raises rates, there's been a lot of concerns around even if the base case is not for a recession in 2022, you know, what does it look like beyond, in 2023 and beyond? And that's really why we're seeing some investors pivot from cyclicals into non-cyclicals, and really getting concerned about companies where they have lower multiple businesses, lower margin businesses, and that will find it difficult to be squeezed by inflation. And as a result, you can see that there's been a preference for defensive names.
RACHELLE AKUFFO: And I want to turn to something in your notes because you talked about the tremendous growth in the syndicated loan and private credit markets. What should people be keeping an eye on in this space?
SONALI PIER: Yeah, definitely. Just to put it into perspective, too, the loan market has doubled in size over the last 10 years and is now slightly larger than the high yield public debt market. And what that means is that with all this growth and demand, it's led to covenant light type structures where there's less protection for the investor. It's led to asset light businesses where there's less tangible collateral in a default. It's also led to more loan-only structures where, historically, loans the first to be paid down in a capital structure. But if it's loan-only, you're also the first to take a hit because there's no subordination below you.
And so these are some of the concerns from the growth, but it's also furthermore something we're looking at today, is with the rise in interest rates, is it comes from an issuer perspective with a rise in interest expense, as these are floating rate products. And with over the last, call it, decade, we've also seen the quality of the loan market deteriorate. And so the interest expense does become meaningful for the lower quality portion of the loan market.
DAVE BRIGGS: Sonali--
SONALI PIER: In terms of private credit-- yeah.
DAVE BRIGGS: Go ahead and finish.
SONALI PIER: Yeah, absolutely. We've seen that market actually double over in just four years, so standing at about $1 and 1/4 trillion today. And there, it's much more around the fact that these are smaller companies and so often less resilient in a downturn or have less pricing power or economies of scale when it comes to inflation. And so, the combination of being smaller scale, and then also the lack of price discovery here can lead to a challenge for risk management.
DAVE BRIGGS: I try to stay far from the crypto weeds, but when I see $200 billion gone in 24 hours, it says something's wrong here. Bitcoin now dropped another 2%. It seems to be trading just like an ordinary tech stock. Is it, and what's the broader market concern, as we see so much wealth evaporate in the crypto space?
SONALI PIER: Yeah, it's been definitely pretty quick fall. If you look at it just since April, crypto's down about 40%, you know, again, highlighting what was supposed to be called a stablecoin. It looks rather unstable. In terms of lookahead, I think that it just highlights that there's been a lot of speculation in that market. And as a result, you know, it's hard to say where there's, call it, more fundamental value.
DAVE BRIGGS: Estimates are 40% of crypto holders underwater at the moment. Thanks, Sonali Pier. Appreciate you, PIMCO managing director and portfolio manager.