Pimco: US Treasuries Offer Cheap Hedge

According to Pimco, markets are ignoring the risk of a US recession, making bonds a “cheap hedge.” Weak employment data in the US has also helped bonds gain value. The US 10-year bond yield closed down 6 basis points to 4.3259 percent on Tuesday, while the 2-year bond yield fell 4 basis points to 4.7704 percent. “Markets do not appear to be pricing in significant recession risk, meaning bonds could be a cheap hedge,” Richard Clarida, Andrew Balls and Daniel Ivascyn, executives at Pacific Investment Management Co., one of the world’s largest bond managers, wrote in a report. Pimco, which predicts that bonds will be more attractive than cash as inflation slows, predicts that fixed-income investment vehicles can perform well if a recession does not occur within the current investment horizon and even better if a recession does occur. The $147 billion Pimco Income Fund, managed by Ivascyn, is up 7.8% over the past 12 months and is up 1.7% so far in 2024, outperforming nearly 80% of its peers. Summers sees yields staying highFormer U.S. Treasury Secretary Lawrence Summers, meanwhile, has predicted U.S. bond yields will remain high for the foreseeable future. Summers also reiterated his view that the neutral interest rate, known as the rate that neither stimulates nor slows economic growth in the U.S., should be 4.5%, well above the Fed’s estimate of 2.6%. “We need to set ourselves a reasonable best estimate of a neutral rate of 4.5%,” Summers said. “That probably means less Fed rate cuts than we’re currently projecting.”