By Gertrude Chavez-Dreyfuss
NEW YORK, Oct 13 (Reuters) – US Treasury yields may have further room to rise, with the Federal Reserve likely to deliver one or two more rate increases before the current tightening cycle ends, Dan Ivascyn, chief investment officer at the world’s largest bond manager, PIMCO, told Reuters on Tuesday.
Speaking on the sidelines of the Grant’s Fall Conference, Ivascyn said he expects the Fed to keep rates unchanged later this month, but sees scope for one or two additional hikes.
“We’ll probably see a Fed on hold now, and they probably go one more time this year,” he said. “Our own view is that one to two tightenings, given the current outlook.”
US 10-year and 30-year yields hit multi-decade highs over the last two weeks. The selloff reflects investors pricing in multiple Federal Reserve rate hikes over the next 12 months amid a spike in oil prices that has rekindled inflation concerns.
Ivascyn believes the long end of the curve could handle more Fed tightening because that has been priced in. But the risk is in the rate-sensitive sectors such as housing and commercial real estate.
“Housing’s already weak. Commercial real estate is where you’re going to begin to see (the impact) and we are already seeing in our business more substantial weakening,” the PIMCO CIO said.
During the question- answer session at the conference, Ivascyn said he expects Fed Chair Kevin Warsh to approach inflation with an open mind, but warned that the Fed’s committee may limit his room to maneuver.
“We actually think Warsh is open-minded towards understanding this inflation process,” Ivascyn said, pointing to crosscurrents and supply-side arguments tied to AI. He said Warsh may be “more inclined to wait and keep policy rates constant.”
Ivascyn, however, cautioned that the outlook has become harder to predict after a jump in headline inflation, with inflation above central-bank targets. He said the committee had communicated that further tightening might be needed before Warsh took over. As a first-time chair, Warsh may not want to oppose the committee, Ivascyn added.
For now, Ivascyn sees policymakers leaning toward tighter policy until inflation becomes clearer. He expects Warsh to remain independent on interest rate and balance sheet decisions, while reducing the Fed’s communication, an adjustment markets will have to deal with.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Mark Porter and Sanjeev Miglani)
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