The market's expectations for interest rate cuts during the year are far higher than those of the Federal Reserve, but PGIM fixed income said that this view may soon change within the next six months.
Although bond traders are re-betting that the Federal Reserve will cut interest rates this year, PGIM fixed income says the Fed may actually be inclined to raise interest rates.
The $1.34 trillion asset management company still insists on reducing its holdings of US Treasury bonds. The company has held this view for the past two years, and believes that the market is too confident that the current policy interest rate is sufficient to reduce the inflation rate to the target level of the Federal Reserve.
Robert Tipp (Robert Tipp), head of PGIM's fixed income global bonds, said that if core inflation continues to rise 0.3% month-on-month in the next few quarters, “I think this will force them to shift from an easing trend to a trend of raising interest rates.”
On Thursday, although Federal Reserve Chairman Powell insisted that he was in no hurry to change policy, bond traders increased their bets on cutting interest rates. The US inflation data released earlier was weaker than expected, prompting traders to expect the Fed to cut interest rates by nearly 50 basis points before the end of the year, higher than the 25 basis point rate cut forecast for the year shown by the Federal Reserve after revising the bitmap.
In an interview, Tip said, “The market generally believes that the Federal Reserve will cut interest rates drastically, and US Treasury yields will also decline. But I think this statement will soon change within the next six months.”
Tip said the 10-year US Treasury yield is expected to rise to 4.5% this year, which is about 30 basis points higher than the trading price on Friday.
He said that due to adverse factors such as the inversion of the US Treasury yield curve, high issuance volume, low possibility of the Fed cutting interest rates, and rising inflation, bonds at the middle end of the curve will still not be favored.
Tipp said, “(The Federal Reserve) will cut interest rates more slowly than people expected,” which is not conducive to taking interest rate risks. He favors high-tier corporate bonds in developed markets, as well as Australian, Swiss, Thai, and Brazilian sovereign bonds, and hedges them based on their relative values.
He said the Federal Reserve may not be able to determine whether its policy interest rate is “strict enough”. “In fact, the average inflation rate is higher than the target, and the economy is still very strong.”