PDI - PDI: Not The Time To Take On Credit Risk

Summary

• The 13% yield on the PIMCO Dynamic Income Fund is impressive, but its use of leverage and exposure to weak credit quality leaves the fund susceptible to downside risks.
• The fund tends to move more in line with equities rather than UST prices, which has seen the PDI outperform long-term USTs by almost 200% since the Covid crash.
• Falling house prices pose a risk to the high weighting of mortgage backed securities in the fund, as macroeconomic conditions are looking very similar to those seen in 2007.
• As we saw during the Covid crash, once credit risks rise, any downside reversal in bond yields would be unlikely to provide much support to the PDI.

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