Pimco suggests that in the short term, the Federal Reserve appears more likely to lag behind its global peers in terms of interest rate cuts...
Andrew Balls of Pacific Investment Management Company (Pimco) stated that it is a good time to bet that the Federal Reserve will cut interest rates less than other major central banks over the next few years.
Currently, global interest rate traders widely anticipate that most developed country central banks, including the Federal Reserve, the Bank of Canada, and the Bank of England, will implement approximately 150 basis points of rate cuts throughout the easing cycle, with the European Central Bank and the Reserve Bank of New Zealand potentially cutting rates slightly more.
However, Pimco expects divergence in the policy paths of these central banks, with the Federal Reserve likely to reduce the magnitude of rate cuts. This judgment is largely due to differences in the housing loan markets of various countries. In short, fixed-rate mortgage loans are more common in the United States, allowing borrowers to lock in historically low rates at the beginning of the pandemic, thus avoiding the impact of the aggressive policy cycle implemented by the Federal Reserve.
Pimco has adjusted its $14.2 billion international bond fund, focusing on potential rate-cutting economies outside the United States, especially in economies where floating-rate mortgage loans are more common. Over the next two years, higher borrowing costs will exert greater pressure on economic growth and inflation in these economies.
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Balls and another portfolio manager, Sachin Gupta, revealed in an interview that relative value investing between the United States and other sovereign markets is currently very effective. He stated, "This strategy is working well, and my confidence is undoubtedly higher than at any other time."
As of April 1, the Pimco International Bond Fund has achieved a 1.3% increase this year, surpassing most peer funds. The fund is co-managed by Balls, Gupta, and Lorenzo Pagani.
Due to stubborn inflation in the United States, Federal Reserve officials have been forced to maintain high interest rates, and traders have been repeatedly frustrated in their attempts to predict the timing of Federal Reserve rate cuts. For example, at the end of last year, the market had expected the Federal Reserve to cut rates six times in 2024. However, as time passed, investors even began to doubt whether the Federal Reserve could achieve the forecast of three rate cuts by 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's view, given the different economic prospects of various countries, this consensus appears particularly fragile.
Gupta stated that to some extent, the market is pricing based on the United States' rate cut forecasts. "Many countries are pricing in rate cuts of 150 to 170 basis points, almost entirely in line with the Federal Reserve, while there are vulnerabilities in terms of economic growth."According to estimates by the Atlanta Federal Reserve, the U.S. economy is expanding at an annual rate of 2.8%, in contrast to the Eurozone's economic growth rate of only 0.5% or lower. The inflation situation is crucial for central banks and bond policymakers. At the beginning of this week, as strong U.S. economic data were released, market expectations for the Federal Reserve to ease in June dropped to just over 50%. Traders have reduced their expectations for U.S. rate cuts for the full year to just under 75 basis points.
Speaking of rate cuts, Bowles said: "In the short term, the U.S. seems more likely to be less aggressive in rate cuts than the rest of the world, which appears more likely to cut rates more than expected."
He said: "The U.S. still needs to wait until it sees a slowdown in its economic activity, while the rest of the world has already seen this slowdown."
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