One of the biggest risks in 2021 is betting that vaccines will bring a quick end to the coronavirus pandemic, according to Pacific Investment Management Co.
With growth-linked assets at or near records, “the biggest risk is probably the market prematurely pricing the end of the pandemic,” said Robert Mead, Pimco’s co-head of Asia-Pacific portfolio management. “It’s easy for markets to get a little too optimistic.”
Mead is also sanguine about the chances of a breakout in inflation and interest-rate risks, while remaining broadly upbeat about the prospects for growth across developed and emerging economies this year. The money manager expresses his view through bets on steeper yield curves in Australia and the U.S.—though his positions are less aggressive than they were last year.
Mead’s strategy is based on the premise that although economies are seeing some pick up in prices, inflation targets remain stubbornly out of reach and major central banks are unlikely to raise borrowing costs for at least three to four years. His views are in contrast to the vibe in markets this week, with bond traders seeing the strongest inflation outlook in years and warnings from BlackRock Inc. and JPMorgan Asset Management on resurgent price risks.
“Inflation is something to think about but we’re not concerned about it in the 12-month horizon,” said Sydney-based Mead. “It’s not as though we think yield curves can reprice significantly because you do have central banks observing and wary of a complete shift in the borrowing cost across the whole economy.”
Steven Major, global head of fixed income research at HSBC Holdings Plc and a renowned bond bull, isn’t buying into the reflation narrative just yet either. In a note to clients Wednesday, he said the bank was sticking with its year-end bond yield forecasts—0.75% for 10-year Treasuries—and was “looking beyond” recent developments in markets. He added it was surprising the market now expected inflation to reach the European Central Bank’s goal of close to 2%.
“We believe that yields are overshooting to the upside,” Major wrote. “Granted, there has been an increase in inflation uncertainty but it seems odd that the market has repriced for the ECB to hit its inflation target, at a time when the amount of economic slack argues for the maintenance of policy accommodation.”
Pimco has trimmed its overweight positions in inflation-linked instruments, with breakeven rates having bounced back from last year “when the market had assumed that inflation would never come back,” Mead said. “They’re not as compelling an investment now as they were,” he said.
The 10-year U.S. breakeven rate—a market-based measure of average inflation rates over the next decade—broke above 2% this year on optimism over vaccine rollouts and a recovery in growth, bouncing back from around 0.5% in March. Ten-year Treasury yields are hovering at around 1.16%.