(Bloomberg) -- US government bonds are a good investment following the recent surge in yields and the prospect of more Federal Reserve interest-rate cuts, according to Pacific Investment Management Co.
The benchmark 10-year Treasury note’s yield at about 4.4% Thursday has risen more than three-quarters of a percentage point from its mid-September low, and yields across maturities are back above 4%.
“You are at very attractive starting levels of yields, and as the Fed cuts you’ll get the benefit of capital appreciation,” Erin Browne, Pimco portfolio manager and head of asset allocation, said on Bloomberg Television.
The Fed cut interest rates by a half point in September and a quarter point this month, moves intended to forestall further softening in labor-market conditions. Treasury yields have risen since the rate cuts began, however, amid signs of economic resilience and in anticipation that President-elect Donald Trump will pursue inflationary policies.
The market-implied odds of quarter-point rate cut on Dec. 18 have dwindled to about 50-50, and the amount of easing priced in by the end of 2025 stands at around 70 basis points — suggesting the Fed’s target range will then be 3.75% to 4%, vs 4.5% to 4.75% currently.
Pimco shares that view and expects most of the shift to occur by mid-year.
“We still have very elevated rate policy despite the fact that we’ve seen both growth and inflation fall back down to more normal levels,” Browne said. “So I think there’s still pretty decent scope for the Fed to cut.”
Pimco expects the yield curve to steepen as the prospect of bigger US deficits curb demand for long-term debt, while shorter maturities like the five-year benefit.
The US five-year yield at about 4.30% was about 31 basis points lower than the 30-year on Thursday. The spread peaked this year at 62 basis points on Sept. 25.
Pimco expects good performance from government bonds globally but favors Australia, Canada and Europe over the US, Browne said. They also offer protection against declines in stocks and other risky assets, she said.
--With assistance from Scarlet Fu.
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