PIMCO CEO Manny Roman Talks Markets, AI, Rate Outlook

Emmanuel Roman · PIMCO

AI financing is not driving rate levels; Middle East conflict and energy prices are, with the swap curve well anchored.

Roman rejects the narrative that AI debt is crowding out or pressuring sovereign bond markets. His evidence is market structure: swap spreads and TIPS show the market is well anchored. If roughly $500bn of AI financing were distorting rates, swap spreads and the swap curve would show it, and they have not. He attributes the high level of rates to the conflict in the Middle East and the energy complex.

“But that is not our view. Our view is that if you look at the swap spread or if you look at TIPS, the market is very well anchored. ... There has been $500,000,000,000 of AI financing, but that's not what's driving the level of rates.”at 3:39

Emmanuel Roman · PIMCO

US rates look more attractive than French rates over five years, on both appreciation and currency.

Roman argues that bonds compete within one global ecosystem where US, UK, Japanese and European rates can be compared. US and French rates are at similar levels. Over the next five years, he says, a investor weighing appreciation and currency would pick US rates over French rates about nine times in ten. He also calls US bonds and mortgages very attractive.

“Think about the rates you wanna own over the next five years in terms of appreciation and in terms of currency. Chances are you would pick nine and a half times out of 10 US rates versus French rates.”at 5:12

Emmanuel Roman · PIMCO

Whether China lets the yuan float is the key macro decision; it could make the yuan a second reserve currency.

Roman says the most important macro decision for the next 20 years is whether China floats its currency. A float would make the yuan a second reserve currency, with real capital flowing in to invest. But Chinese holders might also move money out of their own currency, and the net effect is hard to judge. He notes that central banks need hundreds of billions of dollars of liquidity, which is the dollar's key advantage today.

“Over the next twenty years, the single most important decision, macro decision, is whether China will decide to let the currency float.”at 7:29

Emmanuel Roman · PIMCO

Little to do in Chinese bonds; yields are very low and better opportunities exist elsewhere.

PIMCO looks at China and sees little to do. Chinese bond yields are very low, and bond investors are tightly positioned. Even in a global bond portfolio, Roman says, the firm finds much better places to put money. He adds that there is nothing wrong with China, so this is a relative-value call rather than a strong negative view.

“So we look at China and say not much to do. ... Nothing wrong with China. But as you said, rates are very low.”at 9:55

Emmanuel Roman · PIMCO

Differing state rules on data centers may limit how much compute can be built, adding uncertainty.

Roman says the rules states apply to what can and cannot be done with data centres are very different. Those rules may dictate how much compute can be built. He sees this as uncertainty at the pick-and-shovel level, beyond the political uncertainty around the midterms.

“The views across states in terms of what you can and cannot do are very different. That may dictate how much compute you can build.”at 3:05

Emmanuel Roman · PIMCO

Fed expected to deliver one more quarter-point hike at year-end, then stop.

Roman gives PIMCO's view of the US rate path and says the market agrees. He expects the Fed to raise rates by a quarter point at the end of the year and then stop. This is the policy backdrop behind his view that US bonds are attractive.

“the Fed will raise rates a quarter at the end of the year, and then that's it.”at 4:39

Emmanuel Roman · PIMCO

European central banks will probably need to raise rates twice; Europe's situation is worse than the US.

Roman contrasts the Fed, which he sees as near the end of its hiking cycle, with Europe. He says European rates will probably have to rise twice, and that the European situation is worse than the US one. This shows why he favours US rates over European ones.

“In Europe, they probably will have to raise rates twice.”at 4:47

Emmanuel Roman · PIMCO

Dollar strength will likely persist; currency diversification away from the dollar is less attractive than hoped.

Roman accepts that there are places other than the dollar to hold money, such as the Australian dollar and emerging-market currencies. But the dollar is the only true reserve currency, and for US investors the diversification benefit is smaller than people hope. He concludes that the days of a strong dollar are likely to remain, while admitting currency forecasts are hard.

“there are other place than the US dollar to put your money. ... On the one hand, it's true. On the other hand, the dollar is really the only reserve currency. ... And so the days of a strong dollars are likely to remain.”at 5:47

Emmanuel Roman · PIMCO

Europe has low growth, high debt, high taxes and popular discontent, a structural problem from globalization and a big public sector.

Roman describes Europe as very low growth, with high debt to GDP and high taxation, and little room to raise taxes further. Popular discontent is rising first in France, then Germany, with smaller problems in Switzerland. He calls this a real structural problem and the conclusion of 25 years of globalization, industrial challenges and an oversized public sector. This is his explanation for why European bonds and currency look less attractive.

“The situation in Europe is essentially very low growth, high debt to GDP, high taxation, very little room to raise taxes, and clearly popular discontent first in France, then in Germany... And it's the conclusion of twenty five years of globalization and industrial challenges”at 6:29

Emmanuel Roman · PIMCO

Japan's bond market has turned from dormant to active, with rising rates creating arbitrage PIMCO is trading.

Roman uses Japan as an example of things changing. Japan was very quiet for twenty years, then the market started working and rates began to rise. That creates a lot of arbitrage, and PIMCO now has a large, successful business there. He presents this as evidence that dormant bond markets can turn into opportunities.

“Look at Japan. ... incredibly quiet for twenty years. ... all of a sudden, it works, and then rates go back up. And there's all this arbitrage to be done.”at 10:12

Emmanuel Roman · PIMCO

The S&P 500 as a whole is not cheap, even if some AI stocks may be.

Roman accepts that some AI stocks could be argued to be cheap, but no one knows what their earnings will be five years out. He says the S&P 500 as a whole is not cheap. Combined with the cash flowing into bonds, this makes fixed income look more attractive on a risk-adjusted basis than equities.

“At the S and P as a whole, the S and P is not cheap.”at 12:16

Emmanuel Roman · PIMCO

Investors are rotating large amounts of cash into fixed income across the US, Europe and Asia.

Roman says there is a lot of cash in the system and a lot of it is going into fixed income. Investors are rebalancing portfolios, taking chips off the table and buying more bonds. He sees this trend pretty strongly in the US, Europe and Asia, which makes it a broad positioning shift rather than a single-market move.

“A lot of cash is going into fixed income to rebalance portfolio and basically take some chips off the table and buy more fixed income. And it's true in The US. It's true in Europe. It's true in Asia.”at 12:37

Emmanuel Roman · PIMCO

Private asset-backed and structured finance is very attractive, with expected returns of 12% to 15%.

Roman lists the areas he finds attractive, including private asset-backed and structured finance. He says this segment can generate 12% to 15%. He names it alongside US bonds, emerging-market bonds and European data centres as places where PIMCO sees a lot to do right now.

“Asset backed and structured finance on the private side is very attractive. You can generate 12% to 15%.”at 13:30

Emmanuel Roman · PIMCO

A full Iran peace treaty with free gas flows would cut oil about 40% and make bonds much more attractive.

Roman says the Iran war and energy prices are keeping rates high, and that he did not foresee the war a year ago. He argues against making firm forecasts, because events are outside anyone's control. As a scenario, a full and substantive peace treaty with Iran that allows free gas flows would lower oil about 40% after three months, and bonds would look incredibly attractive.

“Vice versa, if tomorrow morning we announce a full and substantive peace treaty with Iran where there's free circulation of gas after three months, oil will be 40% lower.”at 14:36

Emmanuel Roman · PIMCO

AI is capex-intensive for strong balance sheets but long-term deflationary for prices.

Roman calls AI's appeal that it is capex-intensive but funded by very strong hands, and that it is deflationary over the long term. That matters for his 2027 inflation outlook alongside oil prices. He ties the deflationary effect to changes in the labour market.

“The beauty of AI is it is CapEx intensive from very strong hands, but long term deflationary.”at 15:05

Emmanuel Roman · PIMCO

Robots will reshape the labor market with wide-ranging outcomes, but training them to work with people takes a long time.

After a presentation on robotics in China, Roman says there are many changes with a wide range of outcomes that will change the labour market over the years to come, and that it is hard to predict. He learned that training robots takes an enormous amount of time. Robots are good at one task, but interacting with humans is much more complicated.

“There are a lot of changes with a wide range of outcome that I think will change the labor market over the years to come. ... it takes an enormous amount of time to train the robot.”at 15:31