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Peters describes Fed approach to hikes as 'later, lower, longer'

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[November 20, 2014]  By Jennifer Ablan and Jonathan Stempel

NEW YORK (Reuters) - Greg Peters, who helps manage more than $534 billion in assets as senior portfolio manager at Prudential Fixed Income, a unit of Prudential Investment, said on Wednesday the Federal Reserve will raise benchmark interest rates later in 2015 and more gradually than many believe.

"My operating premise, once again, is really later, lower, longer," Peters told the Reuters Global Investment Outlook Summit in New York. "If anything, any movement by the Fed will not be in the middle half of the year, but later than that."

He said the Fed will most likely wait until at least September 2015, and perhaps into 2016, before raising rates.

"We are in this slow-growth world," he said. "The U.S. looks solid relative to everyone else, but the global construct is slowing. That serves as a cap for growth here in the U.S. and inflation is the same story. If anything, the bias is for disinflation and deflation instead of inflation."

Against that backdrop, Peters expects the yield on 10-year U.S. Treasury notes to range between 1.8 percent and 2.8 percent in 2015. He said this is also justified because the notes offer a better risk-reward tradeoff than global government bonds, including German bunds and Japanese government bonds.

Modest economic growth can also dampen the outlook for higher-octane investments such as high-yield bonds. Peters said Prudential has been reducing exposure there, especially in the energy sector as oil prices have fallen.

"When the market seizes up or starts to trade poorly, you want to be in a position where you can buy," he said. "That's what we did with the high-yield market in October. ... Now with spreads tightening, we're starting to take that risk down."

Fixed income, though, can be a buffer when equity prices are volatile, and Peters said that despite "pockets of richness," the market is not overpriced.

"I haven't seen much change fundamentally to suggest that fixed income, writ large, is overvalued," he said.

Peters sees good values in investment-grade securities, after they "completely underperformed" in 2014, with a preference for structured products such as high-quality collateralized mortgage-backed securities and collateralized loan obligations.

"It actually has better liquidity characteristics than investment-grade corporate bonds," he said. "We still feel like there's a mispricing generally of structured product."

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(Reporting by Jennifer Ablan and Jonathan Stempel; Editing by James Dalgleish and Jonathan Oatis)

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