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 Andrew Balls, PIMCO's global fixed income chief investment officer,
said investors had priced in the prospect of relatively low interest
rates in the future but it was "perfectly plausible" that the
Federal Reserve could raise borrowing costs above the 'neutral rate'
over time.
"Even with our 'new neutral' idea, we don't think the markets are
pricing in enough risk premium around the Federal Reserve rate hike
cycle to come," Balls told reporters.
Volatility has exploded across all financial markets recently, led
by a plunge in benchmark European government bond prices as German
10-year yields looked like they might fall below zero. The sudden
pullback drove yields up toward 1 percent as markets try to gauge
the timing of the first U.S. interest rate hike in almost a decade.
Balls said yields on German government Bunds had been "ridiculously
low" and still looked too low while U.S. inflation-protected bonds
looked reasonable because inflation could revive to 2 percent,
possibly as soon as within 12 months.
"We don't think inflation is dead," Balls said.
PIMCO would be a buyer of Bunds if the 10-year yield moved up toward
1.5 percent, he said, from the current 0.888 percent, adding that
"fair value" is currently a range between 0.75 and 1.5 percent,
taking into account economic fundamentals and the European Central
Bank's bond buying program.
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Another big risk for bond investors is the shrinking of market
liquidity, largely resulting from new regulations on banks. Balls
said PIMCO would "step back" from corporate bond markets if yield
spreads continued to tighten and he felt the "liquidity premium" was
insufficient.
Balls said PIMCO is "relatively constructive" on global equity
markets, favoring emerging markets over developed ones, although
neither are particularly cheap. Overall, rates of return across
financial markets over the next few years will be low, he said.
(Reporting by Jamie McGeever, writing by William Schomberg; Editing
by Ruth Pitchford)
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