How has the cyclical outlook affected the firm’s view on mortgage-backed securities and volatility sales?
McCulley: We expect to be moderately overweight in mortgages, reflecting our secular view that mortgages should benefit from the continuation of Bretton Woods II, which dampens volatility at the long end of the yield curve and therefore favours selling volatility. Mortgages are also very high quality bonds and we want to have high quality bonds in our portfolio. On a cyclical basis, our overall volatility sales are going to be modest relative to where we’ve been in the past. Sometimes we sell volatility directly through options strategies, but we’re less likely to do that in an increasingly uncertain world. Q: PIMCO has also had a long-term preference for holding emerging market bonds and inflation-indexed TIPS. Has the cyclical outlook prompted any change in the outlook for emerging markets or TIPS? McCulley: We reaffirm our commitment to the emerging markets sector even while recognizing that the sector is not as attractively priced because it’s performed so beautifully well. With re
