Anmol Sinha, Fixed Income Strategist: What is the Fed’s apparent reembrace of rate cuts mean for other assets like the dollar? What other themes are we finding compelling in PIMCO portfolios today?
Scott Mather, CIO U.S. Core Strategies: It’s likely that the dollar is, if not at a peak, or very close to a peak. Because some of the big drivers of dollar strength in the last few years have been expanding growth differentials between the U.S. and the rest of the world. We’ve likely peaked out on that. And expanding rate differentials. And we’ve very likely also peaked out on that.
So without those as being powerful propellants of the dollar forward, it’s likely it’s a much more mixed picture. Maybe we don’t have a big dollar move but certainly the tailwind that was propelling it higher seems to be fading into the past.
And with respect to other asset classes, given where we are in the cycle,
Text on screen: The Fed's rate cut was an "insurance policy" against future issues
you know if we have successful insurance cuts which prolong this cycle, which seems like a reasonable base case, you know, the case is for higher-quality but still a more defensive posture with respect to spread assets and spread risk in the portfolio.
So yes, there’s certainly a place for investment grade credit in a high-quality portfolio but there we would stress defensive themes and keep the duration, the tenor of the investments shorter in maturity and higher in quality than in a normal part of the cycle.
And then once again duration itself is attractive in the U.S, particularly in that five to seven-year part of the yield curve where that’s the part of the yield curve where you still get sort of the most benefit of rate cuts.
But you also as in most rate-cutting cycles, when we get to a more serious and deeper part of the rate-cut cycle, the next time we get a serious threat to the growth outlook, that’s where you’ll get the best risk-adjusted returns in our view. So that’s a very sensible core position to build the portfolio around.
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“Insurance” rate cut is considered to be a preemptive cut made in an effort to stimulate the economy.
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