Two of the world’s biggest bond managers, PIMCO and Goldman Sachs, are forecasting US bond rates to rise significantly throughout 2016 despite the turmoil in markets that has characterised the beginning of 2016. One of Australia’s leading bond fund managers believes they are wrong.
Speaking at a conference in Sydney this week, chief economist for Goldman Sachs, Jan Hatzius, said that “ten year yields are likely to go up. The bond market is underestimating to a significant degree the amount of monetary policy normalisation that we are likely to see”. He said that 10 year Treasurys would hit around 3.00% by year’s end, up from around 1.90% today.
This view was largely echoed by Pimco’s Jerome Schneider who expects the Fed to tighten policy more than traders expect. “The fundamentals of the US economy remain fairly intact” he said. His colleague Mihir Worah, in their February 2016 Asset Allocation Outlook, laid out the case for the Fed increasing rates this year more than markets expected.
The 2016 rate hike view was counter-balanced by BT’s Vimal Gor in his January fixed income report. He believed that the Fed was “most wrong” out of “hawkish western central banks and the realistic-dovish-currency-war-at-all-costs central banks of the emerging market economies and the eastern economies” and that data released since the Fed hike now shows.
Indeed, Gor said, “markets had already done the hard work and nearly entirely priced out the possibility of interest rate hikes in 2016”.
The debate hinges around how much China and emerging market economies export deflation around the world on the back of falling commodity prices. Central banks have pumped trillions of dollars’ worth of stimulus into global economies with very little to show for in terms of growth or inflation. The only bright spot in the US appears to be employment growth. The US Fed has raised interest rates once but with a background of massive global volatility whether they raise rates again will be one of the biggest questions in 2016 for bond investors.