Dan Ivascyn Is Excited About a New Era in Fixed Income
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this special 10-year anniversary episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway sit down with Dan Ivascyn, Chief Investment Officer at PIMCO, to reflect on how dramatically the bond market has transformed since 2015. The conversation covers the shift from the zero interest rate era to today's higher yield environment, the explosive growth of private credit markets, and emerging concerns around AI infrastructure financing. (02:30) Ivascyn provides insights on Fed policy uncertainty, credit market dynamics, and why global bond investing has become attractive again after years of US market dominance.
- Main Theme: The dramatic transformation of bond markets over the past decade, from ultra-low rates to higher yields, and the emergence of private credit as a major force rivaling public markets in size.
Speakers
Dan Ivascyn
Dan Ivascyn is the Chief Investment Officer at PIMCO, one of the world's largest bond fund management companies. He joined PIMCO in the late 1990s and has extensive experience in private asset underwriting and credit analysis, helping navigate the firm through major market cycles including the post-2008 financial crisis era.
Joe Weisenthal
Joe Weisenthal is co-host of the Odd Lots podcast and a Bloomberg editor focusing on markets and economics. He has been covering financial markets for over a decade and co-founded the podcast in 2015.
Tracy Alloway
Tracy Alloway is co-host of the Odd Lots podcast and a Bloomberg senior editor covering markets, economics, and finance. She has extensive experience reporting on global financial markets and co-founded Odd Lots in 2015.
Key Takeaways
The Fed Will Remain Data-Dependent Despite Political Pressures
Despite concerns about Fed independence with potential new leadership, Ivascyn believes the central bank will continue focusing on economic data when making policy decisions. (10:15) He expects the Fed to cut rates by another half percent in 2026, but warns that if economic data shows reacceleration or inflation upticks, even a new Fed chair will be willing to pause cuts. The key insight is that inflation expectations matter more than current inflation rates - as long as longer-term breakeven inflation rates remain well-behaved around 2.25%, the Fed has flexibility to look through higher short-term inflation data.
Global Bond Investing Has Become Attractive Again
After years of US market dominance, international bond markets now offer compelling opportunities for US dollar-based investors. (23:28) Ivascyn explains this shift occurred because many international markets had negative yields for years, creating terrible starting valuations, but now offer decent yields with good diversification benefits. Countries like Australia and Germany that aren't running 6-7% deficits provide attractive alternatives. This represents a fundamental shift from the post-financial crisis era when policy activism created high correlations across markets.
Private Credit Growth Mirrors Historical Credit Cycles
The explosive growth in private credit isn't entirely new - similar structures existed in the 1990s with 144A privates and off-balance sheet guarantees. (27:33) What's different now is the scale driven by AI infrastructure financing needs of several trillion dollars. Ivascyn warns that while these structures use investment-grade ratings, investors must do their own fundamental credit work rather than relying solely on rating agencies. The key lesson is that aggressive underwriting in any credit cycle eventually faces challenges, and current tight spreads and weak covenants suggest disappointment ahead in lower-quality segments.
Regulators Don't Bail Out the Same Sectors Twice
This provides a useful framework for understanding where future problems might emerge versus where safety exists. (46:06) After the 2008 financial crisis focused on household lending and banks, regulations heavily targeted those areas, making household balance sheets stronger than they've been in decades. However, corporate lending and private credit markets that escaped heavy regulation post-GFC have grown massively. This suggests future stress is more likely in corporate credit markets rather than consumer lending, offering a strategic allocation insight for long-term investors.
Bonds May Finally Outperform Stocks Over the Next Decade
Based on starting valuations, bonds appear positioned to outperform stocks over the next 5-10 years for the first time in over a decade. (18:35) Ivascyn notes that over the past ten years, the S&P 500 generated 15% annual returns while bonds delivered below 2% annually (negative after inflation). However, current bond yields around 5% even in a 3% inflation environment provide decent real returns, while equity valuations appear stretched. This valuation-based argument suggests investors don't need to rely on the traditional stock-bond correlation for diversification benefits.
Statistics & Facts
- Over the past ten years, the S&P 500 generated approximately 15% annual returns in absolute terms (12% adjusted for inflation), while the Bloomberg Aggregate Bond Index returned below 2% annually and had negative real returns after subtracting inflation. (18:35)
- Since the Global Financial Crisis, investors who blindly bought the lowest quality credit generated 7% more annually than high quality bonds, compared to only a half percentage point of incremental performance from the early 1980s through the GFC. (29:33)
- The private credit market has grown to basically rival the public credit market in terms of size, representing a massive shift from when the podcast started in 2015. (04:00)
