Investors may maintain their search for higher returns “for some time” as the Federal Reserve holds off on raising interest rates until rising wages fuel faster inflation, Barclays Plc’s Michael Pond said.
“There’s not enough wage pressure to move the Fed,” Pond, head of global inflation-linked research at Barclays in New York, said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene. “So that means this environment where the Fed continues its zero-rate policy and investors look to get that extra return, hit singles rather than big swings, could continue.”
While a Commerce Department inflation index tied to consumer spending increased 1.8 percent in May, the biggest 12-month jump since October 2012, and the consumer-price index rose 2.1 percent in May from a year earlier, the Fed “tends to be much more top-down, macro-driven,” Pond said. It’s unlikely to forecast a jump in inflation until it sees wage pressures, “maybe next year,” he said. Average hourly earnings increased 0.2 percent in June, repeating May’s performance, government data showed July 3.
“So we’re in that sweet spot where we have inflation, but it’s not inflation the Fed cares about,” said Pond, whose company is one of the 22 primary dealers that trade with the U.S. central bank.
Treasury yields will rise as the economy continues to improve, Pond said. Benchmark 10-year notes will become attractive to individual investors as their yields exceed 3 percent, he said. The yields fell five basis points, or 0.05 percentage point, to 2.56 percent today in New York.
“We do think that the risks are to the upside in the economy, which means that we’re fairly bearish on fixed income in general,” Pond said.
The Fed has held the benchmark interest-rate target in a range of zero to 0.25 percent since 2008 to support the economy.