Tue. Oct 19th, 2021

US Inflation Updates

A leading US mortgage manager has warned against inflationary pressures of home costs that could raise interest rates and overthrow a sense of complacency among investors.

The comment by Dan Ivascyn, Pimco’s chief investment officer, who managed $ 2.2 million, comes after 10-year US interest rates fell to about 1.25 percent in recent months. Fears of a rise in inflation alarmed investors at the beginning of the year and pushed the key benchmark to a high of 1.75 percent by the end of March.

“There’s a lot of uncertainty about inflation, and while our basic business is that it’s transient, we’re looking at the relationship between house prices and rents,” Ivascyn told the Financial Times. “There may be more sustained inflationary pressures from the rental side.”

Owners’ equivalent rent is an important input used to calculate the US consumer price index. As rent becomes more expensive, investors may become increasingly concerned about ‘tough inflation’, which pushes the Treasury’s 10-year return to 1.75 per cent, Ivascyn said.

A 10-year line-up of the US inflation rate, which shows long-term inflation expectations in the bond market, is close to decades' highs

The Federal Reserve said in its latest policy statement last week that he had ‘made progress’ towards his goals of full employment and 2 per cent average inflation. Fed Chairman Jay Powell said there was more ‘upside risk’ to the inflation outlook, although over time he expressed confidence in temporary price pressures.

The latest benchmark of core consumer prices, followed by the central bank, rose 3.5 percent in the 12 months to June, the fastest pace since July 1991.

“There’s a lot of noise and uncertainty in the data” and “the Fed has a difficult task deciphering the economic information that comes in,” Ivascyn said.

The fund manager said the potential for much higher bond yields is likely to be limited by the prospect of central bank policies tightening if inflation expectations rise.

Bar graph of assets under management ($ billion) showing that Pimco Income is the largest actively managed bond fund

“We do believe that the Fed is likely to act if the Fed sees inflation expectations rise from their comfort zone,” Ivascyn said. “That was the message of Powell’s last two press conferences.”

Pimco expects the central bank to announce a $ 120 billion cut in its current monthly bond purchases later this year to begin the process in January. While the policy shift is ‘well telegraphed’ and data-dependent, Ivascyn said higher bond yields and more volatility in the market are possible.

“It’s a tough market environment and it’s a time you want to be careful,” he said, adding that Pimco had reduced its exposure to interest rate risk as the debt market lowered borrowing costs.

“Valuations are very tense and it makes sense to adjust our portfolios.”

According to Morningstar, Ivascyn oversees the largest effectively managed bond fund in the world. The $ 140 billion Pimco income fund along with Alfred Murata, has a total return of 2% this year, compared to a slight decline in the Bloomberg Barclays US Aggregate Index. In the past year, the fund has expanded its long track record of achieving its benchmark, according to Morning Star.

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