Is it time to "buy the dip" in US Treasuries? PIMCO: If long-term bond yields continue to rise, it will present opportunities to increase holdings

As long-term US Treasury yields continue to rise, PIMCO, one of the world’s largest bond fund managers, instead sees an opportunity to increase holdings.

On August 24, according to Bloomberg, PIMCO believes that as long as there is no unexpected downturn in the US economy, the term premium for long-term US debt will remain elevated, and further rises in yields will provide better entry points for long-term investors. The yield on the 30-year US Treasury has now climbed to its highest level in nearly 20 years, and persistent pressure at the long end has also made the US yield curve even steeper.

PIMCO stated that higher yields not only mean higher interest income, but also create opportunities for rolling along the yield curve and engaging in spread trades.

This view comes at a time when the US Treasury market is experiencing extreme volatility. Last week, US Treasury Secretary Janet Yellen unexpectedly expanded the long-term bond buyback program, temporarily boosting market sentiment, but yields soon resumed their upward trend. As US government debt exceeds 40 trillion dollars and fiscal financing pressures continue to mount, long-term US Treasuries still face considerable uncertainty.

Elevated term premium, long-term yields reverting to historical norms

PIMCO believes that although yields have risen significantly in the near term, the yields on long-term US Treasuries and other major sovereign bonds are still, over a longer cycle, roughly near their historical averages.

From PIMCO’s perspective, the reason current yields appear “exceptionally high” is mainly because investors have become accustomed to the persistently low interest rate environment following the financial crisis. As this unusual period comes to an end, the reversion of long-term yields to historical norms does not mean that bond valuations have lost their appeal.

More importantly, in the absence of a major economic shock, the term premium may remain elevated. This means that even if yields continue to rise in the future, the current relatively high starting yields can provide a stronger foundation for long-term investor returns.

Fiscal pressure remains a risk, but high yields provide a cushion

Fiscal expansion and worsening market expectations regarding US Treasury supply remain the main risks driving long-term yields higher.

This concern is echoed by institutions. According to Bloomberg, JPMorgan and PGIM have warned that declining predictability in US Treasury debt management strategies may further increase government financing costs; Ray Dalio has urged investors to reduce bond holdings and warned that US debt risks could worsen further over the next three years.

But PIMCO believes that rising yields are not only negative. During the bond market crash in 2022, investors faced yields that were too low, and interest income was insufficient to offset the price losses from rapidly rising rates. Now, inflation-adjusted starting yields are higher, so coupon income is expected to provide a much stronger buffer.

Therefore, PIMCO remains positive on US Treasuries: by historical standards, current yield levels are becoming increasingly attractive; if long-term yields keep rising, this may instead create opportunities for long-term investors to increase their positions.