Pimco Bearish on Treasuries as Fed Rate Odds for 2016 Increase

Pacific Investment Management Co. says benchmark Treasury yields will increase this year as inflation accelerates and the Federal Reserve...

Pacific Investment Management Co. says benchmark Treasury yields will increase this year as inflation accelerates and the Federal Reserve raises interest rates.

U.S. 10-year yields will climbed to a range of 2 percent to 2.5 percent, Pimco fund manager Mark Kiesel wrote in an e-mail, from 1.97 percent Tuesday. Investors are adding to bets for the Fed to move this year as gains in employment and manufacturing add to signs the world’s biggest economy is improving. A gauge of inflation expectations for the coming 12 months rose to the highest in almost a year.

“We see one to two rate hikes this year for the Fed, whereas the market is only expecting only one,” wrote Kiesel, who is based in Newport Beach, California, and is one of the three managers for the $87.8 billion Total Return Fund. “If rates were to head towards 2.5 percent, we would be looking to add at that level.”

Treasuries were little changed Tuesday as of 10:36 a.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent note due in February 2026 was 96 30/32.

The probability the Fed will raise rates this year jumped to 78 percent, the highest level in two months. Policy makers will keep their benchmark unchanged at a two-day meeting that starts Tuesday, according to all but four of 97 economists surveyed by Bloomberg.

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The U.S. economy gained more jobs in February than analysts predicted, while a factory slump showed signs of easing, based on reports published this month. Inflation will probably approach the Fed’s 2 percent target in 2016, Kiesel wrote.

The difference between yields on one-year debt and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 170 basis points. The figure climbed to 179 on Monday, the highest level since April 2015.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Nicholas Reynolds, Tomoko Yamazaki

By: Wes Goodman

©2016 Bloomberg News

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