PIMCO CEO Manny Roman Talks Markets, AI, Rate Outlook

PIMCO's Roman says Europe is where the strain sits

Manny Roman's read is that markets are calmer than the headlines suggest. The $500bn of AI borrowing did not push sovereign yields up, and the dollar remains the only reserve currency that matters. The strain sits in Europe, where low growth and high debt leave governments no fiscal room, and in China, where the problem is household confidence rather than a credit crisis.

Takeaways

• Fed hikes once more, Europe twice. Roman expects the Federal Reserve to raise by a quarter point at the end of the year and then stop. European policymakers will probably have to raise twice. US rates now sit at French levels.
• AI debt is not lifting sovereign yields. About $500bn of AI-related financing has been raised, but Roman says it is not what drives the level of rates. Middle East tension and energy prices explain high rates, and he calls the market well anchored.
• The dollar's reserve role holds firm. Currency diversification away from the dollar has proved less attractive than hoped, so dollar strength likely persists. Between US and French rates over five years, an investor picks the US nine and a half times out of ten.
• Europe has run out of fiscal room. Low growth, high debt to GDP and high taxes leave little room to raise more revenue. Discontent runs from France to Germany, and Roman calls it the end of 25 years of globalisation.
• China's weakness is household confidence. Chinese yields have fallen from around 3 to 4 percent to 1.5 percent. Roman finds little value in Chinese bonds. The money is in the bank, and the question is whether people can be nudged to spend rather than save.
• AI capex is deflationary in the long run. Roman calls AI capital-intensive today but deflationary over time. A robotics presentation in China showed machines still slow to train and hard to make interact with people, so the shift in the labour market will play out over years.

PIMCO's playbook

• Blended portfolios can deliver 7 to 8 percent with rates where they are.
• Private asset-backed and structured finance can yield 12 to 15 percent.
• Much of the cash in the system goes into fixed income to rebalance portfolios, with a small slice for the Anthropic IPO.
• The emerging markets business is large and successful.
• PIMCO is building data centres in Europe.

Scenarios Roman flags

• A full peace treaty with Iran and free gas flows would cut oil 40 percent and make bonds look incredibly attractive.
• If China lets the yuan float, it becomes a second reserve currency and capital moves in both directions.