PIMCO, which manages $1.7 trillion in assets, expects tighter financial conditions caused by higher interest rates to curb inflation and lead to a recession in developed markets. The economic contraction should be "mild," but it is preparing for deeper damage.

"Any recession could further challenge riskier assets such as equities and lower-quality corporate credit," Tiffany Wilding, PIMCO’s North American Economist, and Andrew Balls, PIMCO’s CIO Global Fixed Income, wrote in a report.

"We are focusing on high-quality fixed income sectors that offer more attractive yields than they have in several years," they said, referring to instruments such as short-term government debt or highly-rated corporate bonds.

Bond yields, which move inversely to bond prices, have risen sharply last year, particularly for short-term debt, on the back of swift and sizeable rate hikes by global central banks dead set on fighting stubbornly high inflation.

This has made them more attractive, PIMCO said, adding it expects the price swings that characterized that area of fixed income markets last year to subside.

Still, due to continued uncertainty around the inflation outlook and the extent of the economic downturn caused by higher borrowing rates, PIMCO expects to remain neutral on duration - a measure of a portfolio exposure to changes in interest rates.

While corporate debt could perform well during a mild recession, the fund manager said it plans to favor higher-rated credit and remains cautious on areas more sensitive to higher interest rates, such as floating rate and senior secured bank loans, where it sees "material downgrade and default risk even at current policy rate levels."

It continues to have an underweight position on equities, which it sees as overpriced and not fully reflecting current recession probabilities.