One of the largest active bond fund managers in the world has warned that there is a high risk for a severe economic downturn to occur next year.
Daniel Ivascyn said that Pimco’s chief investment officer, Daniel Ivascyn has placed larger bets than usual on UK Government Bonds in comparison to US government bonds, anticipating that the UK would suffer greater economic strain.
“In the UK, a smaller and more open economy with consumers who feel the impact of central bank policies more than US counterparts, you have a greater probability of a more significant economic decline.
We do believe there are more risks of a hard landing.
According to data released last week, the UK economy contracted unexpectedly in October. It shrank by 0.3 percent after expanding 0.2 percent in September. Bank of England cut their fourth-quarter growth forecast to flat on Thursday from 0.1 percent previously. This was due in part to a decline in household spending.
Since late October, UK government bond rates, which move in the opposite direction to prices, are down sharply. The benchmark 10-year rate has fallen by an entire percentage point, to around 3.7 percent.
Investors bet on an accelerated pace of rate cuts in the coming year. The US bond market has led the way, exerting a powerful influence throughout the world.
Bondholders can expect to see their yields fall further if the UK economy weakens.
Ivascyn said that the eurozone is also susceptible to an even deeper economic recession in the coming year. He said that his large investments in UK bonds and European bonds compared to US bonds have “worked very, very well”.
He said that the risk of a harder landing scenario [in the eurozone or UK] and their susceptibility to unanticipated shocks in terms of growth are more important. The US economy is expected to remain resilient through 2023. However, the UK and Europe are at risk of “a more serious deterioration”.
The European Central Bank revised its expectations of euro-area growth for 2023 and 2024 down on Thursday, forecasting a 0.6 percent growth in gross domestic product this year.
The long-term nature of US mortgages is one of the reasons why higher interest rates have a greater impact on the European economy than the US.
BoE and ECB reacted on Thursday to the expectation that interest rates would be cut in 2024. This comes just hours after US Federal Reserve indicated it could reduce interest rates by three times this year. BoE Governor Andrew Bailey said that there is “still some work to do” before the inflation rate reaches its target. ECB President Christine Lagarde also said that there was still “work to do”.
The US economy has grown strongly despite the UK’s and Eurozone’s downbeat economic outlooks.
Last year, the Philadelphia Fed surveyed forecasters who were predicting a 50% chance that the real US GDP would decline in the first quarter 2023. Analysts and economists bet on a recession earlier this year. The resilient US consumer — still buoyed up by the historic stimulus provided by the government during the early days the Covid-19 Pandemic — instead drove GDP growth to 5,2% in the third quarter.
Investors are now in agreement that the Fed can deliver a soft-landing — bringing the inflation to the target level without crashing the economy. Stocks, which do well when the economy is doing well and interest rates are low, have risen as US investors bet on the Fed cutting rates early in 2024.
Ivascyn stated that he does not expect the US to enter a recession in 2019. However, he added that there is a higher risk of a slowdown in the economy than what most traders have priced into their calculations. He said that the divergence in prices between the US and major markets offers an opportunity for investors.
He added, “Global bond investment was dead for quite some time due to negative yields in the UK and Europe.” Global bond investing has returned. This is the first time since a long while that we are excited about relative and absolute value in Europe, the UK and Japan.”