Pouring cold water on rate cut expectations! PGIM, a giant asset management firm with $1.3 trillion in hand: The Fed may still raise interest rates, bearish on US bonds
US asset management giant PGIM Fixed Income stated that despite bond traders expecting the Fed to cut interest rates, the Fed may actually lean towards raising rates. The company continues to reduce its holdings of US Treasuries and believes that the market is too optimistic about policy rates. They anticipate that if core inflation continues to rise, the Fed will shift towards raising rates. While the market expects the Fed to cut rates, PGIM Fixed Income believes that this narrative must change. The company forecasts that the 10-year US Treasury yield will rise to 4.5%. They prefer high-grade corporate bonds and some sovereign bonds
According to Zhitong Finance, although bond traders have reignited their bets on a rate cut by the Federal Reserve, PGIM Fixed Income suggests that the Fed may actually lean towards raising rates. The $1.34 trillion asset management company continues to reduce its holdings of U.S. Treasuries. The firm has maintained this view over the past two years: believing that the market is too confident that policy rates are high enough to bring inflation down to the Fed's target level. Robert Tipp, the global bond chief of the company, stated, "If core inflation continues to rise by 0.3% quarter-on-quarter in the next few quarters, I think they will have to shift from a dovish stance to a hawkish stance."
On June 12th, despite Fed Chair Powell's insistence that the Fed is not in a hurry to change policy, bond traders have increased their bets on a rate cut. Weaker-than-expected U.S. inflation data released this week has led traders to expect the Fed to cut rates by nearly 50 basis points before the end of the year, higher than the Fed's revised quarterly dot plot forecast of 25 basis points.
Tipp stated in an interview, "The market unanimously believes that there will be a lot of rate cuts in the future, and bond yields will decline. I think this view must change in the next six months."
Tipp expects the yield on 10-year U.S. Treasuries to rise to 4.5% this year. This is about 30 basis points higher than last Friday's trading price. He mentioned that due to reversals, high issuance, a lower likelihood of central bank rate cuts, and rising inflation, intermediate-term bonds on the yield curve will still be unpopular.
Tipp noted that the pace of rate cuts is slower than expected, which is unfavorable for taking on interest rate risk. He prefers high-grade corporate bonds in developed markets, as well as sovereign debt from Australia, Switzerland, Thailand, and Brazil, hedging based on their relative value. He said the Fed may not be certain whether it is "tight enough. The fact is, average inflation is above target, and the economy remains very strong."