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Pimco, one of the world’s biggest asset managers, is far from throwing in the towel on the roughly $25 trillion Treasury market despite its selloff in August, according to Mike Cudzil, a fixed-income portfolio manager.
Instead, the bond giant has been cautiously adding duration to its Treasury holdings in a turbulent few weeks for markets, Cudzil said, a period that’s seen the 10-year Treasury yield
BX:TMUBMUSD10Y
eclipse 4.3% to touch the highest level since November 2007.
The bond market rout evaporated yearly gains for bonds and revived Edward Yardeni’s “Bond Vigilantes” argument from the 1980s, that if fiscal and monetary authorities won’t regulate the economy, bond investors will.
“Obviously, a lot has transpired in a short period of time,” Cudzil told MarketWatch on Wednesday. He pointed to Fitch Rating’s cutting its top AAA ratings for the U.S. to AA+ in early August, the Treasury Department’s surprising $1 trillion borrowing estimate for the third quarter, and the Bank of Japan’s tweaks to its policy of yield curve control.
There also has been a growing sense that the Federal Reserve may need to keep interest rates higher for longer to get inflation back to its 2% annual inflation target, he said, given the U.S. economy has yet to sink into a recession, despite rates at a 22 year high.
“If you take that all in, I’d argue it all probably means yields need to move higher,” Cudzil said. But he also doesn’t see signs that 4% or 5% Treasury rates are going to break the back of the government, particularly with U.S. growth forecast to come in surprisingly robust.
See: This Fed GDP forecast has the U.S. growing 5.8% in the third quarter. No, really.
“I think the Bond Vigilante theme is a bit extreme,” he said. “I say that because the move thus far in the bond market hasn’t been all that impressive.”
While recent moves have been sharp, the 10-year Treasury yield started the year around 3.79% and was near 4.19% on Wednesday, a change of about 40 basis points, according to FactSet.
“In the moment, you can write any narrative as to why rates move ‘violently,” he said, but he said a bigger-picture view of 2023 shows “less has happened.”
Pimco, which had $1.79 trillion in assets under management as of late June, expects U.S. economic growth to meaningfully slow in the fourth quarter as the Fed’s aggressive pace of interest rate hikes since last year sink in, providing a path to rate cuts in 2024.
Cudzil also said that forecast could change if the economy continues to be more resilient than expected.
Stocks closed higher Wednesday, but the S&P 500 index
SPX
was still 3.3% lower on the month, the Dow Jones Industrial Average
DJIA
was off 3.1% and the Nasdaq Composite Index
COMP
was 4.4% lower in August, according to FactSet.
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