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Pacific Investment Management Co. (Pimco) issued a warning on Wednesday about the underestimated risks associated with a potential U.S. recession and an additional interest rate hike by the Federal Reserve. The warning came amidst rising Treasury yields, which have reached their highest point since 2007, driven by increasing oil prices and anticipation of persistently high rates until inflation stabilizes.
Geraldine Sundstrom, a London-based money manager at Pimco, suggested that there is a considerable likelihood of another rate increase before the end of the year. Despite this, traders predict less than a 50% chance of a rate hike by December, indicating ongoing disagreement about whether the Fed's actions so far will be enough to control the highest price levels seen in decades.
On Wednesday, yields on 10-year Treasuries remained near a 16-year peak in Asia trading. Sundstrom anticipates that Treasury yields will stay within their current range in the short term and expects the Fed to maintain rates at their current level during its Wednesday policy meeting.
Sundstrom, who oversees various strategies at Pimco, including a dynamic multi-asset fund and a global core asset allocation fund, remains cautious about U.S. economic growth. She believes that the possibility of a recession is still uncertain despite increasing calls for a gentle slowdown. In light of these uncertainties, her future strategy involves sticking with safe assets that offer increased yields, such as U.S. agency mortgages and certain financial credits.
In terms of asset classes, Sundstrom views bonds as relatively cheap compared to equities and advises caution regarding equities. Regarding the Bank of England, she predicts a likely rate hike on Thursday, which she expects to be the last one. Despite a recent surge in yields, Sundstrom still sees potential in UK gilts.
Turning her attention to Europe, Sundstrom describes the landscape as complex for the European Central Bank due to weak growth and structural challenges caused by the energy crisis. She does not anticipate a rapid V-shaped recovery but rather a slower U-shaped recovery. Furthermore, she views the dollar as overpriced compared to several currencies and recommends an overweight position in high carry emerging market currencies as a way to generate liquid yield in a portfolio.
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