PIMCO, the 'King of Fixed Income,' warns: The era of free lunch for 'U.S. Dollar + U.S. Treasury Bonds' is over

One of the world's largest active fixed income management firms, PIMCO, recently issued a warning that the era of "free lunch" enjoyed by foreign investors, which included "U.S. Treasury yields + dollar hedging," has come to an end. Global central banks and institutional investors are also reassessing their excessive concentration in dollar assets. PIMCO advises investors to shift cash positions to high-quality bonds under the new cyclical coordinates and to pay attention to allocation opportunities in value stocks and commodities.

According to Bloomberg, PIMCO pointed out in a LinkedIn post that for decades, foreign investors enjoyed attractive yields on U.S. Treasuries while using the dollar as a natural hedge against equities. However, as the dollar continues to depreciate, this strategy is no longer effective. Hedging U.S. fixed income assets often locks in negative yields, making local bond markets outside the U.S. more attractive to overseas investors.

PIMCO emphasizes that this shift has "far-reaching implications." Central banks and institutional investors are reassessing the concentration of dollars in their portfolios, seeking alternatives that do not compromise prudent risk management. Current U.S. current account data shows that while equity inflows remain strong, allocations in fixed income have become increasingly selective.

Looking ahead to the 2026 market, PIMCO further noted that as interest rates decline, investors holding excessive cash will face reinvestment risks. The firm recommends utilizing the traditional negative correlation between global bond markets and equities to shift cash into high-quality bonds to lock in yields, and predicts that gold prices may have a 10% upside in the coming year, while value stocks have mean reversion potential.

Farewell to "Free Lunch" and Reassessment of Dollar Concentration

PIMCO pointed out that for decades, foreign investors have been accustomed to a "free lunch" model: buying high-yield U.S. Treasuries while enjoying the natural currency hedging advantage brought by a strong dollar. However, the foundation of this logic is crumbling. As the dollar continues to depreciate, the cost of hedging dollar assets for overseas investors has risen significantly, even leading to negative post-hedge yields on U.S. Treasuries.

This change in market environment is prompting a structural adjustment in global capital flows. According to Bloomberg, PIMCO has observed that while the U.S. stock market still attracts significant inflows, the logic of fixed income allocations has changed. Investors are no longer blindly chasing U.S. 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 Strategy

In terms of asset allocation, PIMCO clearly states that cash is no longer an ideal strategic choice in the current rate-cutting cycle. While cash provided exceptionally high returns during the Federal Reserve's rate-hiking period, as the yield curve steepens, cash yields relative to bonds of various maturities have begun to decline.

PIMCO believes that investors still holding excessive cash are missing potential opportunities and facing high opportunity costs and reinvestment risks. When interest rates decline, bonds typically appreciate, thereby enhancing total return potential The institution recommends that investors shift cash positions towards high-quality bonds, particularly those with maturities of 2 to 5 years, in order to lock in attractive yield levels over a longer time frame and achieve capital appreciation across various economic scenarios.

Concerns about Value Stocks and AI Investments

In terms of the stock market, PIMCO remains cautious about the high valuations of U.S. stocks. After years of tech-driven rallies, U.S. stock valuations are still close to historical highs as they enter 2026. PIMCO points out that while AI investments support market sentiment, the tech sector has entered a capital-intensive phase, increasingly relying on debt financing. Additionally, the involvement of ultra-large cloud service providers and chip manufacturers in multi-billion dollar circular transactions further amplifies specific risks within the industry.

In contrast, PIMCO believes that value stocks, which are less visible beneath the surface, are more attractive. The valuations of these stocks remain low compared to historical averages and may experience mean reversion over time. If the U.S. economy shows a trend of growth, it will help various sectors achieve broader profit growth in 2026, thereby benefiting value stocks in the macro environment.

Strategic Position of Gold and Commodities

As a tool for diversifying risk, the position of gold and commodities has been further strengthened. PIMCO notes that the value of gold currently held by central banks has surpassed that of U.S. Treasury bonds, reflecting a structural shift in foreign exchange reserve management. Although recent gold price increases have been driven by momentum and liquidity, and may experience a short-term pullback while being relatively overvalued against real yields, PIMCO still predicts that gold prices could rise by more than 10% in the coming year.

Furthermore, PIMCO reminds investors that commodities are not only a tool for hedging against inflation but also another way to participate in the AI investment theme. The demand for raw materials such as copper, lithium, energy, and strategic assets like rare earths has been driven by AI infrastructure development, and a moderate allocation to commodities can enhance portfolio efficiency. Since 2020, the returns of commodity indices have been comparable to global stocks but with lower volatility, demonstrating their effectiveness as a diversification tool