PIMCO predicts steeper U.S. yield curve, more volatility in 2022

BY Reuters | TREASURY | 01/11/22 01:29 PM EST

NEW YORK, Jan 11 (Reuters) - U.S. investment firm PIMCO is looking to position portfolios for a steeper U.S. Treasury yield curve in expectation of more normal economic conditions, but also expects greater volatility as a result of coronavirus uncertainties and inflationary risks.

PIMCO said on Tuesday that it was leaning toward positioning for a steeper curve as it expects a moderation in inflation to limit future interest rate hikes. It expects inflation to peak by the first quarter and moderate by the end of this year.

Financial markets are expecting that the U.S. Federal Reserve could raise rates as many as four times this year after post-pandemic stimulus measures that boosted the U.S economy but also caused inflation to rise.

"Peak fiscal policy support, and therefore peak real GDP growth, was likely realized in 2021, and the global economy now appears to be rapidly progressing toward late-cycle dynamics," a 2022 outlook report https://www.pimco.com/en-us/insights/blog/key-takeaways-investing-in-a-fast-moving-cycle co-authored by PIMCO's North American economist Tiffany Wilding said.

"Monetary policy in most regions has shifted course toward normalization," it added.

Benchmark 10-year note yields rose to 1.808% on Monday, their highest since January 2020, but fell to 1.775% on Tuesday, as investors viewed an aggressive cycle of interest rate rises could dent growth and inflation in the longer term.

The shape of the yield curve is used to extrapolate investor expectations for U.S. growth and monetary policy. Expectations of sooner-than-expected rate increases have pushed up short term rates, flattening the curve.

The yield curve between two-year and 10-year notes flattened to 83 basis points, the smallest yield gap since Jan. 3. (Reporting by Davide Barbuscia in New York; Editing by Megan Davies and Alexander Smith)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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