As long-term US Treasury yields continue climbing, PIMCO, one of the world's largest bond fund managers, is instead spotting a chance to increase exposure.

According to a Bloomberg report on August 24, PIMCO believes that as long as the US economy avoids an unexpected downturn, the term premium on long-term Treasuries will remain elevated, and further yield increases would offer long-term investors more attractive entry points. The 30-year US Treasury yield has already risen to its highest level in nearly two decades, and ongoing pressure at the long end has also caused the yield curve to steepen further.

PIMCO notes that higher yields not only translate into greater interest income but also create opportunities for rolling down the yield curve and engaging in spread trades.

This assessment comes amid significant turbulence in the Treasury market. US Treasury Secretary Bessent unexpectedly expanded the long-term bond buyback program last week, which briefly lifted market sentiment, but yields quickly resumed their upward trajectory. With US government debt surpassing $40 trillion and fiscal financing pressures continuing to mount, long-end Treasuries still face considerable uncertainty.

Term Premiums Stay High as Long-Bond Yields Return to Historical Norms

PIMCO argues that despite the recent yield surge, long-term US Treasuries and other major sovereign bond yields remain broadly near their historical averages when viewed over a longer time horizon.

In PIMCO's view, current yields appear "unusually high" mainly because investors have grown accustomed to the prolonged low-interest-rate environment that followed the global financial crisis. As that exceptional period comes to an end, the normalization of long-end yields toward historical levels does not necessarily mean bond valuations have lost their appeal.

More importantly, absent a major economic shock, term premiums are likely to stay elevated. This implies that even if yields continue to climb, the higher starting yield available today provides a stronger income base for long-term investors.

Fiscal Pressure Remains a Risk, but High Yields Also Offer a Safety Cushion

Fiscal expansion and deteriorating market expectations regarding US Treasury supply remain the primary risks that could push long-end yields even higher.

This concern has been echoed by other institutions. Bloomberg reports that JPMorgan and PGIM have warned that reduced predictability in the US Treasury's debt management strategy could further raise government financing costs, while Ray Dalio has urged investors to trim bond holdings, cautioning that US debt risks could worsen over the next three years.

However, PIMCO contends that rising yields do not come with only negative consequences. During the 2022 bond market selloff, investors were confronted with excessively low starting yields, where interest income was insufficient to offset price losses from rapidly climbing rates. Today, with higher inflation-adjusted starting yields, coupon income is better positioned to provide a thicker buffer.

As a result, PIMCO maintains a positive stance on US Treasuries: by historical standards, current yield levels are becoming increasingly attractive, and if long-end yields rise further, it could actually present an opportunity for long-term investors to add to their positions.