How does PIMCO formulate an investment strategy when faced with the uncertainties we’ve discussed?
Powers: When we look out at interest rate levels, the shape of yield curve, volatility and spreads available on income products, which are the four big elements of our top-down strategies, we note that risk premiums in all four areas have been compressed. The compression in risk premiums is largely due to the lagged effects of monetary stimulus and the resultant liquidity that has been provided, but we also note that noncommercial pools of money have played a significant role in compressing risk premiums. In particular, Asian central banks and emerging market commodity and energy exporters have accumulated large reserves through their current account surpluses. The need to invest these large pools of money has created a large marginal demand for not only the dollar but U.S. fixed income. The desire to increase income in these policy pools of wealth has led to diversification strategies, with new large exposures to mortgage-backed securities and other spread products. The weight of this
