The bond market has priced in too many Federal Reserve interest-rate cuts, says Daniel Ivascyn, who runs the world’s largest actively managed fixed-income fund at Pacific Investment Management Co.
Traders anticipate a total of 115 basis points of Fed easing this year, swaps rates showed on Tuesday afternoon in New York. That suggests a half-point reduction at one of the three remaining meetings in 2024, starting with Wednesday’s decision. Across the next 12 months, the market sees more than 240 basis points of total cuts, a pace that has been rare outside recessions.
“We do think that the markets may be getting a little bit ahead of themselves in terms of near-term cuts,” Ivascyn, who manages the $163 billion Pimco Income Fund, said on the Odd Lots podcast with Bloomberg’s Tracy Alloway and Joe Weisenthal. “Over the course of the next few months there are some risks of reaccelerating inflation, which may lead to less cuts than are priced into the market.”
Market expectations are vulnerable if inflation resurges, according to Pimco’s chief investment officer. Ivascyn said he’s reducing some exposure to the “very front end of the yield curve” — notes due in one or two years — and instead favoring five-year maturities.
Yields on policy-sensitive two-year Treasury notes have tumbled to 3.6%, from about 5% at the end of April, compared with five-year notes yielding about 3.4%.
Ivascyn’s Income Fund has returned about 3.7% annually over the past five years, compared with a 0.7% gain for the Bloomberg US Aggregate Total Return Index, data compiled by Bloomberg show.
Ivascyn spoke ahead of the Fed’s Wednesday decision, when it is expected to announce its first rate cut in four years. Traders have fully priced in a quarter-point reduction, and see about a 55% chance of a half-point move.
Calling Wednesday a “close call,” Ivascyn said the size of the cut isn’t critical. With stocks near an all-time high and “very tight” credit spreads, markets have “done a lot of work for the Fed” in easing financial conditions already, he said.
That reduces the risk of a policy error as the Fed has ample room to fine-tune the pace of rate cuts, he added.
“They likely have enough tools at their disposal where even if they get something wrong in a narrow sense, that they can course correct to get the market back on track as necessary,” Ivascyn said.
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