Pimco's Kiesel Says Investors Should Increase Cash, Cut Credit

(Bloomberg) -- Now is a good time for investors to increase their cash holdings because stocks are fully priced and bond prices are falling as interest rates climb, according to Pacific Investment Management Co.’s chief investment officer for credit.

“Valuations for all things are not cheap,” Mark Kiesel, a manager of the Pimco Investment Grade Corporate Bond Fund and Pimco Total Return Fund, said Tuesday at a Bloomberg LP event in Beverly Hills, California. “To me that just argues you’ve got to own more cash right now.”

Cash should rise to about 10 percent to 15 percent of portfolios from the more typical 5 percent to 10 percent, Kiesel said. Pimco recommends reducing exposure to credit, especially longer-duration holdings, because risk is building as rates increase, he said.

Bond yields have risen in response to Federal Reserve rate hikes, swelling U.S. deficits and increasing signs of inflation. On May 16, yields on 2-year Treasuries reached their highest level since 2008 and 10-year Treasuries climbed to 3.1 percent, a mark unseen since 2011.

Pimco, which oversaw $1.77 trillion as of March 31, expects increased market volatility as central banks globally withdraw accommodations implemented after the 2008 financial crisis, according to a long-term economic outlook being prepared for release this month.

Firm’s Repositioning

Kiesel said Pimco has increased its cash position as the firm became more cautious. And while he didn’t specify just how much of the firm’s assets are in cash now, an increase of 5 percent would mean selling some $89 billion of securities.

The $71 billion Total Return fund fell 2.5 percent this year through May 21, outperforming 51 percent of its peers. The $12.4 billion Investment Grade fund slid 3.2 percent, beating 71 percent of competitors.

Among Kiesel’s other comments:

  • A U.S. recession is unlikely within one or two years, but Pimco is “pretty confident” one will start within three to five years.
  • Investors can expect low-to-mid single-digit returns in the coming years, which “sounds incredibly depressing.”
  • Bond yields are unlikely to rise too far because global demand for income will continue to produce long-term buyers such as pensions and insurers.

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