The prospect of a big-spending Trump administration in the US has prompted Pimco to view inflation-linked bonds, or TIPS, as the new risk-free asset.
In a note on asset allocation, Pimco said it now treats US Treasury Inflation-Protected Securities (TIPS), rather than nominal government bonds, as the ‘risk-free’ asset.
The change in tack is a result of the new-found optimism in global equity markets spurred by the prospect of higher inflation and fiscal spending by the incoming Trump administration.
"Asset markets have reacted, with US equity markets rallying, global interest rates rising and yield curves steepening," said Pimco.
But there is still "substantial uncertainty" about the fiscal spending that is intended by the new US administration and what will actually be enacted, said the note.
"While higher growth is a possibility, our view is that fiscal expansion and protective trade policy when the economy is operating near full capacity makes higher inflation almost a certainty," said Pimco.
"From an asset allocation perspective, the recent developments have caused us to view TIPS rather than nominal government bonds as the ‘risk-free’ asset."
Overall, Pimco's portfolios are "modestly" overweight risk assets, with the fund manager "maintaining ample dry powder" for opportunities down the track.
"Given our base case of modest global growth aided by a fiscal boost in the US, we believe positive returns can still be earned via targeted risk-taking," said Pimco.
The recent sharp pick-up in yields has also caused the fixed income manager to moderate its underweight position to high-quality government bonds.
"In the US, we prefer TIPS. In Europe, we see better value within nominal bonds in German bunds and are overweight, particularly relative to France, given relatively tight spreads and a full political calendar ahead," said Pimco.