Pacific Investment Management Co. warned that the Federal Reserve could pivot back toward interest rate hikes if US inflation moves higher, with the asset manager preferring to buy bonds in other markets.
The California-based firm, one of world’s largest fixed income investors, maintains a preference for bonds in the UK, Europe, Australia and Canada over US Treasuries, on the view that central banks there are more likely to deliver on policy easing this year.
“If inflation starts to re-emerge then there’s a possibility that the Fed hikes instead of delivering any cuts,” Mohit Mittal, chief investment officer for core strategies at Pimco, said in an interview on Bloomberg Television.
Mittal forecasts US inflation will finish the year around 3.5% — little changed from current levels — but acknowledges potential for price pressures to build further.
A key US price gauge topped forecasts for a third straight month on Wednesday, with the core consumer price index unchanged at 3.8% year-over-year. This prompted traders to drastically scale back bets on Fed policy easing to less than two quarter-point hikes by December, with only a 20% chance of the first cut coming in June. At the start of the year, markets were wagering on as much as 150 basis points of easing.
Pimco is sticking to its bet on bond markets outside of the US, given the likelihood of central banks including the Bank of England and the European Central Bank delivering on interest rate cuts before the Fed. Mittal says that UK gilts are particularly attractive.
“We are increasing our exposure to gilts,” he said. “Yields are significantly higher than the nominal growth rate of the economy so that is supportive and unlike the US you don’t have continuously higher fiscal deficits.”
This article was provided by Bloomberg News.