Pacific Investment Management Co. sees Treasuries falling as the Federal Reserve raises interest rates. Stocks and corporate bonds should be able to weather the shift, according to the manager of the world’s biggest bond fund.
“We expect about a 50 to 70 basis point backup in 10-year rates over the next year or so,” Pimco money manager Mihir Worah told reporters Thursday in Sydney. “Risky assets, whether they’re corporate bonds or equities, should be able to handle that kind of backup in rates.”
The Fed will probably boost borrowing costs in September as inflation slowly picks up, said Worah, who is one of three managers of the $117.4 billion Pimco Total Return Fund, the record holder for asset size. The fund, based in Newport Beach, California, cut its holdings of U.S. government and related debt in March, based on the latest investment figures available on the company website.
Fed officials are contemplating when to raise their benchmark interest rate from close to zero as the U.S. economy shows signs of uneven economic growth. While inflation is close to zero, bond market prices suggest it will pick up in as soon as two years. The danger is that investors will respond by demanding higher yields on their Treasuries, sending prices down.
The benchmark U.S. 10-year yield was little changed at 1.96 percent as of 6:53 a.m. New York time, falling from 2.17 percent at the end of 2014. The price of the 2 percent note due in February 2025 was 100 13/32, based on Bloomberg Bond Trader data.
A 50-basis-point increase in yield over one year would result in a loss of about 2 percent for an investor who bought 10-year notes now, after accounting for reinvested interest, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
The median forecast of economists surveyed by Bloomberg predicts U.S. 10-year yields will rise to 2.80 percent in the second quarter of next year.
Fed officials have held their benchmark, the target for overnight lending between banks, in a range of zero to 0.25 percent since 2008 to support the economy. Policy makers will increase borrowing costs in about eight months, according to a Morgan Stanley index.
U.S. employers added more than 200,000 jobs in both January and February, before hiring slowed to 126,000 in March. Retail sales have lagged behind economist forecasts, and gross domestic product growth slowed. A report next will show GDP declined further in the first quarter from a year earlier, a Bloomberg survey of economists shows.
The Fed’s preferred measure of inflation rose 0.3 percent in February from a year earlier, falling short of the central bank’s 2 percent target.
Bonds show traders anticipate a pickup. The difference between yields on two-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of traders’ outlook for consumer prices, was 1.58 percentage points, the most since July. The figure was below zero as recently as January.
The Total Return Fund cut it holdings of government debt to 21.6 percent of assets in March from 35.3 percent in February, according to Pimco’s website. In addition to Treasuries, holdings in the category may also include futures and agency bonds, the website shows. It added to holdings of emerging-market securities.
Total Return, which is managed from Pimco’s office in Newport Beach, California, returned 5 percent in the past year, beating 74 percent of its competitors, data compiled by Bloomberg show.