(Bloomberg) — While bond traders have rekindled bets for interest-rate cuts by the Federal Reserve, PGIM Fixed Income says the central bank may actually lean back toward a hike.
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The $1.34 trillion asset manager is remaining steadfast to its underweight call on Treasuries. The firm has held the view for the last two years, believing that the market is over-confident on policy rates being high enough to bring inflation down to the Fed’s target.
If core inflation continues to rise 0.3% month-on-month in the following quarters, “I would think that would have to move them from an easing bias to a hiking bias,” said Robert Tipp, head of global bonds at the firm.
Bond traders loaded up on June 12 their bets for rate cuts despite a pushback from Fed Chair Jerome Powell, who stuck to the message that the central bank is in no rush to shift gears. Softer-than-expected US inflation data this week have prompted traders to price in nearly 50 basis points of cuts by year-end, more than the Fed’s revised forecast of one 25 basis point move.
READ: Bond Market Splits From Fed Again by Betting on 2024 Rate Cuts
“The consensus is convinced you’re going to have a lot of rate cuts coming and lower Treasury yields,” Tipp said in an interview. “Soon in the next six months, I think that narrative has to change.”
The yield on 10-year US Treasuries is expected to rise to 4.5% this year, Tipp said. That’s about 30 basis points higher than where the note traded on Friday.
Tenors in the middle of the curve will remain out of favor due to an unfavorable combination of inversion, high issuance, less likely central bank rate cuts and higher inflation, he said.
“Rate cuts are coming slower than people expect” and that works against taking interest rate risk, Tipp said, who prefers high-grade corporate bonds in developed markets and sovereign debt of Australia, Switzerland, Thailand and Brazil on a hedged basis for their relative value.
The Fed likely can’t be sure that it’s “restrictive enough,” he said. “The fact of the matter is, inflation on average is running above target and the economy is still really strong.”
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