Pacific Investment Management Company (Pimco) has indicated that unless an unexpected economic recession occurs, the additional compensation investors demand for holding long-term government bonds is likely to remain elevated, potentially creating opportunities for investors to purchase bonds at higher yields.

Pimco considers bonds attractive and would consider increasing positions if yields continue to climb, as higher yields present opportunities for income generation, carry trades, and rolling down a steeper yield curve. The firm noted that elevated yields could ultimately benefit investors by generating more income, as higher inflation-adjusted initial yields may provide sufficient income to cushion against price declines.

Due to the underperformance of long-dated bonds, which has led to a steepening yield curve and pushed up term premiums, the 30-year US Treasury yield has climbed to its highest level in nearly two decades. Pimco observed that long-term government bond yields in Europe, the UK, and Japan have also been rising.

"We still find bonds attractive, and if yields continue to move higher, we would look to add, because higher yields bring income, carry, and the opportunity to roll down a steeper curve," wrote Marc Seidner, Chief Investment Officer of Non-Traditional Strategies at Pimco, and Pramol Dhawan, Head of Emerging Markets Portfolio Management, in a report.

Last week, US Treasury Secretary Scott Bessent unexpectedly expanded the long-dated bond buyback program, a move that rattled markets. The US national debt has just surpassed $40 trillion, and borrowing costs have surged accordingly. However, this relief proved short-lived, as bond yields resumed their climb a day later amid persistent concerns over global fiscal pressures and elevated inflation.

JPMorgan and PGIM have warned that increased uncertainty over the US Treasury's debt management strategy could ultimately lead to higher borrowing costs. Billionaire Ray Dalio has urged investors to reduce their bond holdings, cautioning that a US debt crisis could erupt within three years.

Pimco stated that additional fiscal stimulus when the economy does not require it, along with deteriorating expectations for government debt supply, are key risks that could push yields into even higher territory. Analysts note there are many reasons to believe US Treasury yields will rise structurally this decade, but a crucial distinction lies in how the growing deficit is financed.

Despite the recent surge, Pimco noted that yields on long-dated Treasuries and other sovereign bonds remain only near their long-term historical averages. "Current yields only appear exceptionally high relative to the artificially suppressed rates of the post-global-financial-crisis era," Seidner and Dhawan wrote.

Pimco believes higher yields could ultimately benefit investors by generating more income. In 2022, rapid interest rate hikes meant initial yields were too low to offset price declines. Now, the firm argues, higher inflation-adjusted initial yields may provide sufficient income to buffer against price drops, while the overall bond market continues to perform solidly.

Seidner and Dhawan stated: "From our perspective, current yield levels are increasingly attractive by historical standards, offering long-term investors a highly compelling entry point."