The question every influential bond investor gets asked countless times is whether this is it. Has the 35-year bull market for fixed income finally come to an end?
Unfortunately one of the world's most influential bond investors, Dan Ivascyn, the chief investment officer of PIMCO, won't answer definitively. "It's complicated," he says.
"Within fixed income markets you could stay within ranges for a very long time – literally throughout one's entire career," the 47-year-old tells The Australian Financial Review.
"We look at a UK long-term government bond yield chart going back to 1730 and you will notice the big rise in rates [in the 70s] and the fall in rates [in the 80s] was the aberration.
"You can have very long periods, almost 100-year periods, where rates remain relatively low."
Ivascyn assumed the top investment role at the $US1.5 trillion ($2 trillion) asset manager in 2014 after the controversial departure of Bill Gross, who is known to many as "the bond king".
And though Ivascyn says not much has changed in the way PIMCO manages money, there's no denying he has taken a very different approach to making public calls than his predecessor.
Gross, now at Janus Capital, made himself a media celebrity by making grand statements – and most recently called a 2.6 per cent 10-year US bond rate the "line in the sand" which if breached would mark the end of the bond bull market.
Not Ivascyn.
Economic cycle
Asked whether the US 10-year rate, arguably the most important data point for financial markets, would more likely hit 2 per cent or 3 per cent before the end of the year, Ivascyn simply explains there are plausible views for both options.
A 2 per cent rate would reflect the relative value of US bonds against zero rate Japanese and German bonds, and with global debt levels as high as they are, an attractive place to preserve capital.
The 3 per cent rate, meanwhile, reflected the end of the economic cycle, an inflation rate at its target and a Federal Reserve in play.
The bond rate traded at 2.4 per cent on Wednesday, as bonds gained while stocks had their worst day since November.
"We are neutral, and owning high-quality bonds will protect investors from unanticipated weakness in equity and high-yield credit markets," he says.
No sound-bite there.
On Wednesday, PIMCO published its cyclical outlook offering its views on bonds, equities, currencies, commodities and corporate debt.
The outlook revealed PIMCO is upbeat about the global economic growth picture and upgraded its economic forecasts for the US and Europe.
Yet despite the upbeat growth forecasts, PIMCO is wary of financial assets, which look expensive.
"Today we look around the world, and it very well may be a more rosy outlook but markets are priced as such, and that is why we are more cautious," he says.
"When you look at how bonds and stocks are priced, they're priced with less margin for error."
Ambitious policies
Like everyone in the bond market the fund's attention is on the mindset of the US Federal Reserve, which increased interest rates last month, and the ability of the Trump administration to pass its ambitious policies on healthcare, tax and infrastructure.
PIMCO expects that the Fed will hike interest rates twice more this year, but reading the intentions of the Fed in the longer term is tough given the key decisionmakers won't be around for much longer.
"You have to be careful of having too high a conviction on what the Fed is going to do because this Fed, at least Janet Yellen and Stanley Fischer, will likely not be there [soon]."
The Fed's actions will be data dependent and for the time being Ivascyn says the data is looking better.
Whether it's forced to pick up the pace will depend on "timing and degree" of fiscal stimulus that the Trump administration is able to pass.
"Tax reform is incredibly complex and difficult to pass given the significant interest in other parties and there is a global element.
"We think you could end up with a paired-down package that resembles tax cuts rather than tax reform."
One debate at PIMCO that is particularly pertinent to Australia is how effective central banks will be in tightening conditions by lifting interest rates.
Ivascyn worries that given most US households and companies have locked in lower rates for long periods of time, a rate hike will be largely ineffective in putting the brakes on an over-heating economy.
PIMCO's Australian head Rob Mead fears the Reserve Bank of Australia has the opposite problem.
While the Fed may have put its foot firmly on the brake, a slight tap by the RBA may be too jarring. It's a central bank that is trapped, he says.
More debt
This is because Australians have taken on more debt at low interest rates, making households highly sensitive to even small upward changes in the cash rate.
"We used to be appreciative of the fact that our central bank had such a direct transmission mechanism to the cost of borrowing – as you lowered rates the benefit to the borrower was immediate [because mortgages are floating rate,]" says Mead.
"Arguably what we have now is a central bank that is somewhat trapped in the sense that while we have had a big build-up in household leverage it's been taking place at lower and lower rates."
The combination of heightened sensitivity to interest rates and an elevated housing market which has forced borrowers into taking on loans with less interest coverage, and the sheer size of debt that has been underwritten over the last decade means even "a small increase in policy rates" could have too large an impact.
It may leave the Reserve Bank powerless to act and he says this explains why regulators are again turning to so-called macroprudential policies to address a "housing market that refuses to stop going up".
"When you look at some of the statistics, whether it be household debt to GDP [gross domestic product] pushing 140 per cent compared to the US at sub 80 per cent and you look at house price appreciation from the pre-crisis peaks, with the US up single digits and Australian prices up 80 per cent, there is clearly a disconnect," says Mead.
The high level of global debt coupled with ageing populations, which results in lower growth, are central to PIMCO's reluctance to call the end of the bond bull run even if they see higher rates over the short term.
"We still think powerful global forces which we have talked about for many years will continue to influence yields."
As an investor he says the firm is wrestling with the fact that global debt levels are high and rising, which poses risks to investors.
He singled out European peripheral bonds, saying that they had previously bought big but now believe they are expensive at their current low rates.
"The debt levels are unsustainable and as investors it's critically important to keep that in the back of our minds," Ivascyn says.
One region where PIMCO is constructive is China, which it has sought to understand better even if the broader funds management community has shifted its attention elsewhere.
"In the investment management industry you try to gain insights where people are a little less focused," he says.
"Within China – we just think they have enough flexibility to manage through the early stages of this growth transition."
Efficient markets
Ivascyn studied at the University of Chicago, which preached the mantra that markets are efficient, and while he agrees it's hard to beat the market, it's possible.
"You need to go into work every day accepting that it's a challenge."
He's also a student of behavioural finance which emphasises the importance of structures and process to overcome embedded human biases.
This is more crucial in :the world of Twitter where you can get bombarded with the noise."
Ivascyn himself doesn't tweet but he's hooked on the platform as a source of information on markets, politics and sport.
"It's useful in the sense that information can move markets [and] can happen quickly but it's dangerous because it can lead to an excessive focus on short-term sound-bites and make it difficult to have a sufficiently long-term perspective."
Ivascyn may have taken the role vacated by the bond king, but he's not pretending it's glamorous.
He's just as interested in talking about cross-currency basis swaps as he is in making proclamations about the 35-year bond market bull run.
"You have to think like an engineer and come in and you have to comb through thousands of [bond security] offerings," he says.
"It's not exciting stuff. CNBC doesn't want to hear it – it's not a good sound-bite. But it's painstaking attention to detail."
"The markets provide lots of opportunities for dislocation but it's a team effort and you just have to leverage your resources."
