Pimco released a warning this week that lower-quality credit might default more than higher-quality credit. This is the kind of insight you'd expect from a firm managing $1.7 trillion, roughly the same as telling people wet roads are slippery.
The recommendation is to position portfolios away from junk and toward quality assets. Translated: don't buy things that stop paying you back. Buy things that keep paying you back instead.
Truly revolutionary stuff.
Income investors receiving this advice must feel like they just paid for a cooking class where the instructor warned them that rotten meat tastes worse than fresh meat. The actionable takeaway is to avoid the rotten meat. The fee for this wisdom is two percent annually plus twenty percent of gains.
Pimco sees plenty of opportunities in high-quality assets, which is finance speak for "we think Treasuries and investment-grade bonds will continue to exist." The spike in defaults they're warning about applies exclusively to the garbage tier, the stuff that was already garbage when rates were zero and is somehow still finding buyers now that rates aren't zero.
Retail fixed-income investors are now scrambling to reposition their portfolios, which in practice means calling their advisor and asking what fixed-income means. The advisor will explain bonds. The retail investor will ask if bonds are different from bond funds. The advisor will bill for the call.
The entire warning boils down to this: when the economy weakens, weak companies fail first. Strong companies fail later or not at all. This wisdom comes from the same industry that needed a government bailout because they couldn't figure out that housing prices don't go up forever.
Pimco's default spike warning is the financial equivalent of a meteorologist predicting that winter will be colder than summer, then charging you a management fee to stand near the thermometer.
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