Pimco’s Ivascyn sees a mild recession ahead and multiple investment opportunities

The US is likely headed for a recession, but there’s a chance the downturn will be comparatively mild given the strong underlying fundamentals, according to Pimco’s fixed income expert Dan Ivascyn.

In remarks echoed by other speakers at CNBC’s Delivering Alpha conference Wednesday, Pimco’s chief investment officer offered a perspective that wasn’t quite so gloomy. While he said he still sees a cut coming, he expects consumer and corporate balance sheets to offset the damage.

“Our current view is that the base case is a recession. We think it’s going to be potentially a pretty mild recession,” Ivascyn told CNBC’s Leslie Picker. “One of the reasons we think that way is because the baseline, you know, looks pretty good, as does the consumer record [is] pretty strong, corporate balance sheets in most parts of the credit markets are pretty strong.”

He pointed to the “tremendous economic momentum” that could offset the effects of the recession.

“All areas that tend to be weak links in recessionary environments have pretty strong fundamentals,” he added.

Others who spoke were less hopeful.

Severe recession

Stanley Druckenmiller, the chairman and CEO of the Duquesne Family Office, previously said he was leaving room for a deeper recession caused by central bank inaction as inflation surged in 2021.

After keeping monetary policy loose as inflation hit its highest level in more than 40 years, the Federal Reserve and its global counterparts have hiked interest rates. This, in turn, has fueled fears of a recession as the US economy posted negative GDP growth for the first two quarters of 2022 and is on track to add just 0.3% recorded.

Despite these concerns, Ivascyn said the investment environment remains fruitful. He identified opportunities for fixed income in quality emerging markets, as well as mortgages and banks.

While the latter two were the main drivers of the 2008 financial crisis contagion, they are largely strengths now as homebuyers choose fixed-rate mortgages and credit quality is high.

“People have accumulated a tremendous amount of equity in their homes. There’s been a big shift to fixed-rate mortgages, with many of these borrowers settling on very, very low interest rates for the next 30 years,” Ivascyn said. “Mortgage-related assets are looking quite interesting in our opinion.”

But he said he avoids betting against the US dollar, which is hitting near 20-year highs against global peers.

“We are reluctant to use larger negative dollar terms. It is included in the tool kit. It’s something we monitor,” he said.