One of the world's largest active fixed-income management firms, PIMCO, recently issued a warning that the era of the "free lunch" long enjoyed by foreign investors—combining "US Treasury yields with a dollar hedge"—has concluded. Furthermore, global central banks and institutional investors are reassessing their excessive concentration in US dollar assets. PIMCO advises investors to shift cash positions into high-quality bonds within the new cycle framework and to pay attention to allocation opportunities in value stocks and commodities.
According to Bloomberg, PIMCO stated in a LinkedIn post that for decades, foreign investors enjoyed attractive yields from US Treasuries while using the US dollar as a natural equity hedge. However, with the persistent depreciation of the US dollar, this strategy is no longer effective. Hedging US fixed-income assets now often locks in negative yields, making local bond markets outside the US more attractive to overseas investors.
PIMCO emphasized that this shift has "profound implications." Central banks and institutional investors are re-evaluating the concentration of US dollars in their portfolios, seeking alternatives that do not compromise prudent risk management. Current US current account data shows that while equity inflows remain robust, allocation within the fixed-income sector has become increasingly selective.
Looking ahead to the 2026 market outlook, PIMCO further noted that as interest rates decline, investors holding excessive cash will face reinvestment risk. The firm recommends utilizing the traditional negative correlation between global bond markets and equities by shifting cash into high-quality bonds to lock in yields. It also predicts a potential 10% upside for gold prices in the coming year, alongside mean-reversion potential for value stocks.
The era of the "free lunch" and the reassessment of dollar concentration are over. PIMCO pointed out that over past decades, foreign investors became accustomed to a "free lunch" model: purchasing high-yielding US Treasuries while benefiting from the natural hedging advantage of a strengthening US dollar. However, the foundation of this logic is crumbling. As the US dollar exchange rate continues to depreciate, the cost of hedging dollar assets has risen significantly for overseas investors, even leading to negative hedged yields on US Treasury holdings.
This change in the market environment is prompting a structural adjustment in global capital flows. According to Bloomberg, PIMCO observes that while the US stock market continues to attract substantial inflows, the allocation logic for fixed-income funds has shifted. Investors are no longer blindly chasing US Treasuries but are beginning to seek alternatives in other developed and emerging markets, such as the UK, Australia, Peru, and South Africa, where bonds are becoming more attractive in terms of both real and nominal yields.
Cash is no longer the preferred strategic choice. At the asset allocation level, PIMCO clearly stated that in the current interest rate cutting cycle, cash is no longer an ideal strategic choice. Although cash provided exceptionally high returns during the Fed's rate-hiking period, as the yield curve steepens, cash yields have begun to decline relative to bonds of various maturities.
PIMCO believes that investors still holding excessive cash are missing potential opportunities and facing high opportunity costs and reinvestment risks. When interest rates fall, bonds typically appreciate, thereby enhancing total return potential. The firm advises investors to shift cash positions into high-quality bonds, particularly those with 2 to 5-year maturities, to lock in attractive yield levels over a longer time horizon and achieve capital appreciation across various economic scenarios.
Regarding the stock market, PIMCO remains cautious about the high valuations of US equities. After years of a technology-driven rally, US stock valuations remain near historical highs as they enter 2026. PIMCO notes that while AI investment supports market sentiment, the technology sector has entered a capital-intensive phase, increasingly reliant on debt financing. Furthermore, multi-billion-dollar circular transactions between hyperscale cloud providers and chip manufacturers amplify industry-specific risks.
In contrast, PIMCO finds value stocks beneath the surface more attractive. Valuations for these stocks remain low compared to historical averages, suggesting potential for mean reversion over time. If the US economy exhibits trend growth, it could facilitate broader earnings growth across various sectors in 2026, creating a favorable macro environment for value stocks.
The strategic role of gold and commodities is further reinforced. PIMCO points out that the value of gold held by central banks now exceeds that of US Treasuries, reflecting a structural shift in foreign exchange reserve management. Although the recent gold price surge is driven by momentum and liquidity, potentially leading to a short-term correction and making it appear overvalued relative to real yields, PIMCO still forecasts a potential price increase of over 10% in the coming year.
Additionally, PIMCO reminds investors that commodities serve not only as an inflation hedge but also as an alternative way to participate in the AI investment theme. As AI infrastructure development drives demand for raw materials like copper, lithium, and energy, as well as strategic assets like rare earths, a moderate allocation to commodities can enhance portfolio efficiency. Since 2020, commodity index returns have been comparable to global equities but with lower volatility, demonstrating their effectiveness as a diversification tool.
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