U.S. bond giant PIMCO said on Wednesday it was bullish on the performance of long-term bonds over the next year due to higher yields and expectations inflation has peaked.
Core U.S. inflation is likely to be in the 2.5%-3% area by the end of next year, the fixed income asset manager said in a paper about its outlook on the economy and markets over the next six to 12 months.
U.S. economic growth is expected to slow the remainder of 2023 and next year, “hovering between stagnation and mild recession,” it said.
U.S. Treasury yields have surged to fresh highs in recent months partly because of concerns interest rates will remain restrictive for longer than the market expected due to a surprisingly resilient economy.
PIMCO said much of this year’s resilience was due to fiscal support, with deficits widening and U.S. households still benefiting from pandemic-related stimulus measures. But it sees that support waning next year at the same time as inflation keeps eroding households’ excess savings.
“As fiscal support fades, the drag from tighter monetary policy will intensify,” it said.
PIMCO, which manages about $1.8 trillion in assets, expects to continue to favor long-term bonds over the next year, as they provide high yields not seen for over a decade while offering a cushion against economic uncertainty.
But it said it was cautious on corporate credit due to recession risks, and particularly floating-rate assets such as bank loans, which are strained by higher interest rates.
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