Pimco, one of the world's largest bond fund management companies, warned that the economic plan of the newly elected US President Trump could lead to an economic "overheating," and may force the Fed to stop cutting interest rates, posing a danger to the surging stocks after Trump's victory.

Pimco's Chief Investment Officer Dan Ivascyn said that the rally in US stocks may reverse after the Republican presidential candidate wins by a large margin.$S&P 500 Index (.SPX.US)$And.$Nasdaq Composite Index (.IXIC.US)$Last week, they all soared to historic highs, as the market expected Trump to cut taxes, relax regulations, and impose tariffs during his second term.

But he warned that in the already strong US economy, these "re-inflation" policies could lead to inflation.

Ivascyn told the UK Financial Times, "The situation is not as simple and straightforward as a one-way re-inflation trade, and risk assets should not be blindly optimistic." "You have to be careful what you wish for," he said. Due to the US inflation rate still being higher than the Fed's target, "there is some risk that the prosperity triggered by these policies may re-impact inflation expectations or actual inflation."

He said that Trump's policies are coming at a time when economic growth momentum is strong enough, which could lead to overheating of the economy.

Ivascyn's comments respond to concerns from some other investors and strategists that the reaction of higher-risk asset classes to last week's election results is inconsistent with the rise in inflation and the possibility of long-term tight monetary policy. Expectations for the US interest rate path have been a major driver of the US stock market in recent years.

The S&P 500 index rose by over 4% last week, marking the largest single-week gain so far this year, but Trump's victory also will determine$Bitcoin (BTC.CC)$push it to historic highs, and pushed junk bond spreads (the premium that low-rated borrowers pay for issuing bonds relative to US Treasuries) to the lowest level in 17 years.

Meanwhile, due to rising inflation expectations, government bonds were heavily sold earlier last week, although the 10-year US Treasury bonds regained lost ground after Fed Chairman Powell stated that it is still too early to determine the substantial impact of Trump's policies.

Although Ivascyn does not expect 'massive inflation' to occur, he mentioned that Trump's policies can support long-term growth and warned, 'We might of course return to a point where the Fed becomes a little concerned, and markets start pricing out some of the rate cuts,' 'So, we believe this means being cautious about the valuation of risk assets.'

Following a series of strong economic data releases in recent weeks, the Fed has started to slow down the pace of monetary policy easing. Last Thursday, the Fed cut interest rates by 25 basis points to a target range of 4.5% to 4.75%, a slowdown from the significantly large 50-basis-point cut in September.

Market pricing last week indicated that traders are also beginning to reduce their bets on Fed's loose policy towards 2025, now forecasting that the rate cut by the end of next year will be less than 1 percentage point.

Before the Fed announced the interest rate decision, Ivascyn stated that the threshold for another rate hike would be 'very high,' but 'the more realistic situation is that rates will remain unchanged for much longer than people realize.'

He said this would not be a 'friendly scenario for the commercial real estate market,' 'this may bring some problems to some industries, which have recently rebounded in anticipation of Fed rate cuts.'

However, Ivascyn pointed out that even before the Fed policymakers need to intervene, 'the markets have often done the heavy lifting for the Fed,' meaning that the market may begin to digest changes in inflation and interest rate outlook without the need for signals from the Fed.

Ivascyn stated that at some point, bets on rising inflation and interest rates could drive US bond yields up to levels unfavorable for the stock market, making US Treasury bonds an attractive investment, thereby weakening the attractiveness of stocks.

He said, "There is an actual limit to how high it can reach before the US bond yield begins to have a negative impact on risk assets," and "This may lead to some positive market sentiment and positive economic momentum reversing," "Markets will become a kind of regulator."

Editor/Rocky