Bond investors should be thinking outside the U.S. over the next six to 12 months because other central banks will likely make interest rate cuts well before the U.S., said Tiffany Wilding, managing director and economist at Pacific Investment Management Co., in an April 5 interview.
Wilding, who co-authored PIMCO’s latest cyclical outlook published on April 3 with Andrew Balls, the firm’s chief investment officer for global fixed income, believes bond markets outside the U.S. are particularly attractive because developed markets in particular have lower inflation risks while their recession risks remain larger than the U.S.
“I think there’s more reason to believe that some of the exceptionalism in the U.S. that we saw last year, both in terms of growth and also in terms of inflation versus developed market peers, could keep the Fed at elevated rates for somewhat longer than some of these other developed markets,” said Wilding.
"If you’re in the U.S., maybe the worst-case scenario is you’re kind of clipping that 7% coupon, that’s still a good thing to do, but if you can diversify outside the U.S. within those bond markets, than you can actually potentially get some capital appreciations,” she said in the interview.
Wilding and Balls in the outlook particularly like the U.K., Australia and Canada. These and other developed markets' economies have proved to be more sensitive than the U.S. to higher interest rates, they said.
“If you look at what the market is pricing for the near-term policy path across the developed markets … it’s very consistent,” said Wilding in the interview. “It’s basically the markets are pricing almost all the central banks to have a similar destination in 2025. And just given the differences in economies, pass-through rates and monetary policy, the interest-rate sensitivity of various economies, we just don’t think that’s a reasonable pricing.”
In their outlook, Wilding and Balls said inflation is likely to remain stickier in the U.S. in 2024. They said core consumer price index inflation in the U.S. may end the year between 3% and 3.5%, and personal consumption expenditures inflation, the preferred view of the Fed, could be in the range of 2.5% by 3% at the end of the year. Inflation in the Eurozone, meanwhile, could average between 2% and 2.5%.
The PIMCO outlook said developed market central banks are broadly signaling rate cuts to begin in mid-2024, and the pace of subsequent cuts could be faster, and “the year-end 2025 destination rate could be lower, outside the U.S.,” they said in the outlook.
The April 10 release of the latest U.S. consumer price index, which rose 0.36% in March, hotter than forecast, seemed to strengthen PIMCO’s outlook. In a follow-up statement to that announcement, Wilding said the report and the strong jobs data released the week of April 1 complicate the timing of the Fed’s rate cuts.
“With this latest data, there is a strong case to push out the timing of the first cut past mid-year and it further strengthens our cyclical outlook that called for the U.S. central bank to ease monetary policy at a more gradual rate than its counterparts in developed market economies,” said Wilding.
PIMCO's latest cyclical outlook is available on its website.
