For more than forty years, PIMCO’s Secular Forum has provided a rigorous framework to step away from short-term market noise and analyze the structural forces that will shape the global economy and financial markets over the next five years. Rarely has this exercise been more relevant than it is lately.
We are currently in a season of global rupture. The geopolitical risk we highlighted in our Secular Outlook 2025 “The Era of Fragmentation” has become a moving reality in 2026. Fragmentation is manifesting globally in energy prices, supply chain data, growth rates, and investment returns. The cost of complacency has sharply increased. Investors can no longer rely on a framework of globalization, government intervention, and suppressed volatility, which is now outdated.
However, investment opportunities in this global reality remain abundant. This is because the generational-style repositioning of bond yields that occurred a few years ago, and the theme of our Secular Outlook 2024 “The Yield Advantage,” allows us to target resilient, globally diversified portfolios focused on high-quality bonds in both public and private markets.
Key Macroeconomic Themes
Breakdown, not transition.
The fragmentation of alliances on security, trade, and the financial front that we indicated last year is accelerating. The trajectory of the global economy has shifted from a narrow range of plausible outcomes to a framework of uncertainty with a wide distribution of possible scenarios. That said, we expect the US Dollar to remain the dominant global currency in the near future.
Resilience put to the test.
Politics, geopolitics, and economic security policies now directly impact growth and inflation, increasing dispersion among countries, sectors, and companies rather than just market and macro volatility. These forces are likely to test economic resilience, especially considering that fiscal space is limited. In our base case, we do not foresee a sudden slowdown nor a fiscal crisis for the United States or loss of market access for other major sovereign issuers. The most probable evolution is episodic volatility with periodic renewed market focus on debt sustainability and fiscal credibility.
Fat tails, in both directions.
The explosion of investments in artificial intelligence (AI), increased defense spending, and investments in energy security could contribute as much as $14 trillion to global capital expenditure over the next five years. AI, with its potential to reduce labor costs and increase productivity, could become a powerful disinflationary force, but geopolitical shocks and the reconfiguration of supply chains will likely exert upward pressure on prices. In other words, there is a range of possible outcomes (this is what is meant by “fat tails”) on both extremes of the central scenario. We firmly believe central banks will do everything possible to keep inflation expectations anchored over the next five years.
Key Investment Themes
The credit loss cycle is emerging.
After years of relatively effortless performance, the default cycle is returning, and we expect significantly higher losses in lower-quality credit such as leveraged loans and direct lending in private markets. We believe this is the start of a long-term trend where credit quality and selection will be more important than ever. At this stage of the cycle, there is an acceleration in financial engineering structures based on credit ratings and liquidity seeking, particularly in private markets, but no systemic risk on the scale of 2005–2006. In this context, asset-based finance and listed credit markets appear relatively attractive. Moreover, we believe credit tensions will create considerable opportunities to provide capital solutions to borrowers.
The yield advantage has become more attractive.
Investors can aim to build high-quality bond portfolios diversified globally with yields of 5%–7% in local currency, competitive with long-term equity returns and with lower potential volatility. Elevated starting yields can allow for a greater contribution from coupons in a variety of possible scenarios, with less reliance on capital gains or precise macro forecasts.
Bonds can still offer diversification benefits in portfolios, particularly in economic contraction scenarios.
Central banks have much more room to cut rates in future economic crises compared to the decade before the pandemic, and we expect they will use it. An actively managed bond portfolio can offer investors diversification and capital appreciation potential in future recessions.
