The world's largest debt base “threw cold water”, and expectations of the Federal Reserve's interest rate cut have been hit again!

Golden10 Data ·  Apr 3 23:37

Source: Golden Ten Data

Pimco said that in the short term, the Federal Reserve seems more likely to lag behind its global peers in cutting interest rates...

Andrew Balls (Andrew Balls) of Pacific Investment Management (Pimco) said that now is a good time to bet that the Federal Reserve will cut interest rates less than other major central banks in the next few years.

Currently, interest rate traders around the world generally expect that most developed country central banks, including the Federal Reserve, the Bank of Canada, and the Bank of England, will cut interest rates by about 150 basis points throughout the interest rate cut cycle, and that the ECB and the Federal Reserve of New Zealand may cut interest rates slightly more.

However, Pimco expects that the policy paths of these central banks will be divided, and the Federal Reserve may cut interest rates less. This judgment is due in large part to differences in the housing loan market among countries. Simply put, fixed-rate mortgage loans are more common in the US, which enabled borrowers to lock in historically low interest rates in the early stages of the pandemic, thus avoiding the impact of a cycle of aggressive measures implemented by the Federal Reserve.

Pimco adjusted its $14.2 billion international bond fund, mainly targeting economies outside the US that are likely to cut interest rates, particularly in economies where variable interest rate mortgage loans are more common. Over the next two years, higher borrowing costs will put more pressure on economic growth and inflation in these economies.

Powers and Sachin Gupta (Sachin Gupta), another portfolio manager, revealed in an interview that investing in relative value between the US and other sovereign markets is now very effective. He said, “This strategy has worked well, and my confidence is definitely higher than ever before.”

As of April 1, Pimco International Bond Fund has achieved a 1.3% increase this year, surpassing most similar funds. The fund is managed jointly by Bowers, Gupta, and Lorenzo Pagani (Lorenzo Pagani).

As America's stubborn inflation forces Federal Reserve officials to maintain high interest rates, traders have been hit many times while trying to predict when the Fed will cut interest rates. For example, at the end of last year, the market expected the Federal Reserve to cut interest rates six times in 2024. However, as time went by, investors began to wonder whether the Federal Reserve could achieve the forecast of cutting interest rates a total of three times before the end of the year.

Currently, the global market generally believes that June may be the starting point for major central banks to begin an easing cycle. However, according to Pimco, this consensus is particularly fragile given the differences in economic prospects across countries.

Gupta said that to some extent, the market is priced based on the US interest rate cut forecast. “Many countries are cutting interest rates by 150 to 170 basis points, almost exactly in line (with the Federal Reserve), yet they are vulnerable in terms of economic growth.”

According to estimates by the Atlanta Federal Reserve, the US economy is expanding at an annual growth rate of 2.8%. In contrast, the Eurozone's economic growth rate is only 0.5% or less. The inflation situation is critical to central bank and bond policymaking. At the beginning of this week, with the release of strong US economic data, the market's expectations that the Federal Reserve will begin easing in June fell to slightly more than 50%. Traders have lowered the US interest rate cut expectations for the whole year to just under 75 basis points.

Speaking about cutting interest rates, Powers said, “In the short term, the US seems more likely to be less likely to cut interest rates than the rest of the world, and those regions seem more likely to cut interest rates beyond expectations.”

“America still needs to wait to see a slowdown in its economic activity, and the rest of the world is already seeing this slowdown,” he said.


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