The US Department of the Treasury is holding a record-breaking auction this week, with $125 billion worth of Treasury notes and bonds up for grabs.

To provide insights into the implications of this event on Treasury yields (^TYX, ^TNX, ^FVX), PIMCO Core Strategies Chief Investment Officer Mohit Mittal joins Catalysts.

Mittal highlights that there has been "a correction in valuations," and this repricing has created value in the fixed-income market. He believes that "on a go-forward basis," investors can expect "healthy returns in fixed-income under most scenarios", which is "why you're seeing a healthy amount of demand" for these auctions.

Mittal advises investors to look at high-quality fixed-income areas, suggesting sectors such as agency mortgages in the US. Additionally, he recommends exploring opportunities "outside of the US where growth has been somewhat weaker," naming high-quality sovereign bonds as potential options.

In the ongoing "higher-for-longer" interest rate environment, Mittal believes that yields will be able to sustain in this environment. However, he adds that "the market is already pricing that" in, suggesting that the current yield levels reflect the market's expectations of persistent higher rates.

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Angel Smith

Video Transcript

Markets are on edge ahead of a busy week for bond sales.$42 billion of 10 year notes on sale today.And this is part of the record breaking $125 billion worth of Treasuries that are up for a this week.So what does the demand of these auctions tell us about investor sentiment For more on the fixed space?We are joined by Mo in court court strategies.CIO Thank you so much for joining us, mo He.I'm curious about your thoughts on the demand that we're seeing at these auctions coming in a little bit better than we had perhaps anticipated.What is that telling you about the action that we're going to see moving forward in the space?Thanks for having me.I think, as you mentioned, the demand has certainly been pretty good with respect to Treasury auctions.I think when we take a step back, we have seen correction in valuations.When we started the year tenure was at 3.9%.Where we were a couple of weeks ago, tenure had reached around 4.7% but certainly a good amount of repricing essentially What that repricing has done is it has recreated value in fixed income.I think that value essentially implies that on a go forward basis over the next one year, three years, investors can expect healthy return in fixed income under most scenarios.And then in a scenario where growth starts to slow down, investors can have even a double digit return in fixed income, which is why you are seeing a good amount of demand both in the Treasury auctions but broadly speaking across fixed income flows.So when you are talking about that investment opportunity there more specifically, where do you see the most opportunity for investors?Given that demand that we will likely see?Yeah.So I think from our perspective, we see plenty of opportunities in high quality fixed income within the US space.I think agency mortgages is one area where we see a lot of value.That sector underperformed over the last couple of years, particularly post Silicon Valley Bank, as some of the bank portfolio liquidations led to cheapening in that space.When we go outside of us, we are seeing value in some of the high quality sovereign and high quality credit expressions outside of us where growth has been somewhat weaker, where inflation is getting closer to central bank's target.For example, in countries like UK in Australia, in Canada and then when we go beyond government and high quality mortgage market, even areas like high quality investment grade and then even FX or emerging market foreign currency space is offering value for investors to utilise to construct a high quality fixed income portfolio.Well, I'm curious about your take on that, particularly because in reaction to what we heard from the cash car yesterday, saying that we could have to stay higher for longer if we can't tame inflation, is that a catalyst for yields at the back end of the curve to also stay higher for longer?And then would that make the long end of the curve more attractive to US investors?I think yields can certainly stay higher for longer.I think the argument for higher for longer is inflation persisting above central bank's target for some extended period of time.Another argument for higher for longer is the ongoing fiscal deficits, where, as far as I can see, we can expect somewhere around 6 to 6.5% deficits, irrespective of the election outcome in the US so in that federal worker yield can certainly stay higher for somewhat longer.But market is already pricing that when we look at 10 years around 4.74 0.6% a 30 year, around 4.6 to 4.7% that is already pricing in some form of hire for longer.I think one of my colleagues has done Tiffany Wilding has done a pretty interesting work with respect to central bank policy, and the assessment is that at this point, central bank policy is shifting towards what we would call an opportunistic disinflation.Under that paradigm, the central bank can remain focused on getting inflation towards target, but at the same time also be mindful of the downside risks that are posed to unemployment rate or employment when the monetary policy is already restrictive, as it is currently.So under that framework, even if the inflation doesn't get to 2% inflation gets to two point something somewhere closer to 3%.You could see Fed cut rates 1 to 2 times this year, and in a scenario where inflation persists somewhat, longer than the Fed can keep rates here for some extended period of time.But if growth was to come down, then there's plenty of room for Fed to cut rates much more than currently expected.And that could lead to a pretty meaningful upside return in fixed income.To what extent does the risk of the deficit play and your view?Long term?We're hearing a lot more about that elephant in the room lately.Yeah, so I think deficit is a concern.I think you know, 6.5% area deficit.For an economy that already has nearly 100% debt to GDP and where the nominal growth potential is, you call it somewhere around five ish percent.So essentially that means that the deficit is higher than the nominal growth, which means that over time, debt to in the US economy continues to grow higher.So it's certainly a concern.I think the way it plays out is probably through the term premium in the US rates, which is why our preference is towards more intermediate bonds towards more five year, seven year point of the curve relative to a more longer dated point in the curve.Moet Matal!We really appreciate you taking the time to join us here this morning.Pimco Core Strategies Chief Investment Officer Thanks so much.