PIMCO said on Monday it plans to diversify its government bond exposure by buying outside the United States, where its outlook on long-term government debt is bearish due to a deteriorating fiscal profile.
The $2 trillion bond-focused asset manager said it favors short-term and intermediate U.S. Treasuries, while it has reduced allocations to long-dated U.S. government debt securities due to the potential of higher inflation as well as additional debt issuance to fund deficits.
"We have become more hesitant to lend longer term given U.S. debt sustainability questions and potential inflation catalysts, such as tariffs and the effects of immigration restrictions on the labor force," Marc Seidner, chief investment officer for non-traditional strategies, and Pramol Dhawan, portfolio manager, said in a note entitled "Thoughts from the Bond Vigilantes".
So-called bond vigilantes - investors who punish profligate governments by selling their bonds - made a comeback last year, pushing 10-year Treasury yields to 5% for the first time in 16 years on concerns over growing U.S. debt issuance.
Treasury yields rose when President-elect Donald Trump won the U.S. presidential election last month as investors anticipated further tax cuts would worsen government deficits, which are funded via debt.
A resurgence of inflation because of protectionist trade policies was also seen as pushing yields higher.
However, yields have fallen back after Trump subsequently named Scott Bessent as U.S. Treasury Secretary, a move that assuaged some of the most extreme market concerns over excessive spending and aggressive tariffs.
However, this could change unexpectedly, cautioned PIMCO.
"Episodes of fiscal excess regularly give rise to questions about when these vigilantes might turn up," said PIMCO.
"There is no organized group of vigilantes poised to act at a specific debt threshold; shifts in investor behavior typically occur at the margin and over time ... we are already making incremental adjustments in response to rising U.S. deficits".
Beyond reducing exposure to long-dated U.S. Treasuries, PIMCO said it is investing in UK and Australian bonds due to their better fiscal positions.
It also favors lending to corporates in both public and private markets that are better positioned to withstand high interest rates - a consequence of high government debt levels.
"The U.S. remains in a unique position because the dollar is the global reserve currency and Treasuries are the global reserve asset," said PIMCO.
"But at some point, if you borrow too much, lenders may question your ability to pay it all back," it added.
