Where 3 Bond Titans Think Rates Are Headed

Alfonzo Bruno: The Federal Reserve cut its benchmark interest rate by 25 basis points at its most recent meeting in July. This was the first rate cut since 2008. Stubborn inflation, a looming trade war, and softness in economic data globally were some of the reasons behind the Fed's decision. A lot remains uncertain, but Chairman Powell may have left the door open for more rate cuts. Amidst the Fed's decisions and trade headlines, the market reaction was notable, leading to a stronger U.S. dollar, a broad sell-off in riskier assets such as U.S. equities, and a 10-year yield that fell back below 2% for the first time since 2016.

PIMCO believes there is still more room to run in interest rates as another rate cut is probable this year. They believe the downside risks to the economy, via trade wars, tariffs, or global growth deceleration, may continue to loom over the short term. As a result, they think interest-rate exposure may be a good hedge against both credit and equity risk. They also note that downside momentum in U.S. rates may continue to build as global investors continue to search for yield in an environment where $14 trillion worth of bonds offer negative yields.

PGIM (Fixed Income) shares that view, stating the global low-rate outlook may continue the search for yield in fixed income, which should keep downward pressure on U.S. yields as they are still the highest in the developed world. In the extreme scenario, Bob Michele, head of global bonds at JP Morgan, sees the potential for a 0% 10-year yield in the United States, akin to that of Germany or Japan. So, what does this mean for investors? It’s very hard to predict the direction of interest rates. Yet, further downward pressure on U.S. Treasury yields limits investors' ability to generate income without taking more risk. The Fed’s decision in July and future decisions may have a big impact on the direction of the economy and potential asset-class returns, but it’s very difficult to call those effects in advance and profit from them. That’s why it’s prudent for investors to continue to commit to a long-term mindset.