- Fixed-income asset manger PIMCO says it's preparing for a "harder landing" for the global economy.
- The fund's CIO said markets are too hopeful about central banks' ability to lower interest rates from this year's highs.
Bond fund leader PIMCO is bracing for a "harder landing" of the global economy, saying investors appear overly confident that policymakers will be able to lower interest rates in the not-too-distant future.
PIMCO chief investment officer Daniel Ivascyn's comments, from a new Financial Times interview, suggests that borrowing costs will stay high for longer than markets are currently pricing in, causing an economic downturn as central banks in Europe and US press ahead with their fight against inflation.
After raising benchmark rates by a staggering 500 basis points since last spring, the Federal Reserve has signaled there will be at least two more 25-basis-point increases. The sharp rise in borrowing costs has sparked concerns in the US that the world's largest economy could slip into a recession later this year.
"The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks," Ivascyn said, adding that it typically takes about five or six quarters for the impact of higher rates to be felt in the economy.
"We would argue that the market may still be too confident in the quality of central bank decisions and their ability to engineer positive outcomes," Ivascyn said. "We think the market is a bit too optimistic about central banks' ability to cut policy rates as quickly as the yield curves are implying," he added.
While US inflation has declined significantly from the 40-year highs reached last summer, it still remains double the Fed's 2% target, coming in at an annual pace of 4.0% in May.
According to Ivascyn, inflation is still a real problem.
"Today we have a real legitimate inflation problem. It will likely be harder for central banks to cut policy even if the economy is weakening as long as inflation is comfortably above their [2 per cent] targets," he told the FT.
He added that the fixed-income asset manager is moving to high-quality government and corporate bonds to be "more defensive and more liquid."