The Cio At $2.2 Trillion Pimco Highlights A Corner Of The Bond Market That's More Attractive And Less Risky Than Cash

• Dan Ivascyn, CIO of PIMCO, advises against holding cash due to potential Fed rate cuts impacting yields.
• He says 5-year Treasury notes offer higher yields and potential price appreciation during growth shocks.
• PIMCO outlines the tweaks it's made to its bond portfolio in response.

Cash is usually seen as just about the least risky asset in the world of investing.

You put your money into ultra-short-duration fixed income vehicles like money market funds or 3-month Treasurys bills, collect yield, and take on virtually no duration risk.

But Dan Ivascyn, the chief investment officer at PIMCO, which manages $2.2 trillion, says there's heightened risk in holding cash right now — specifically, the risk that the Federal Reserve slashes rates and investors lose out on the more robust returns they could earn going a bit further out on the yield curve.

Instead, the best opportunity in the bond market right now is the 5-year Treasury note, Ivascyn said.

"The risk for a cash investor is that there's some unanticipated growth shock," Ivascyn said during a media roundtable at PIMCO's New York City offices on Thursday.

"You may be stuck over a five-year holding period where I thought I was getting a great four-ish percent cash return, all of a sudden it dropped to 2%, and I earn 2% the rest of the way," he added.

Going to a 5-year duration allows investors to lock in slightly higher yields — the 5-year Treasury currently yields about 4.2% annually — for a longer period, Ivascyn said.

In a growth-shock scenario where rates drop, 5-year Treasury investors would also presumably get the added benefit of their assets appreciating in price, as investors move to safehavens like bonds.

On the opposite side of the risk spectrum, however, is inflation. The further out on the yield curve one goes, the more rates become sensitive to inflation. When inflation rises, as it is now, investors tend to demand higher yields to compensate. That then decreases the value of the bond, making it so investors would have to sell at a loss if they needed the cash.

But Ivascyn said PIMCO's base-case view is that inflation remains in generally check over the next five years, as he expects deescalation in Iran, and disinflationary pressures from AI.

Ivascyn told Business Insider that while PIMCO was overweight the short end of the yield curve as of two or three years ago, the firms has steadily moved up its average duration, adding to their 10-, 20-, and 30-year allocations, while also buying Treasury inflation-protected securities (also known as TIPS) to hedge inflation risk.