PIMCO Chief Investment Officer: The bond market has already digested rate cut expectations, markets are betting on the Federal Reserve ahead of time.

Daniel Ivascyn, who manages the world's largest actively managed fixed-income fund at Pacific Investment Management Co. (Pimco), said the bond market has already absorbed the impact of multiple rate cuts by the Federal Reserve. Ivascyn stated on the Odd Lots podcast, "We do think that the market may have gotten ahead of itself in terms of recent rate cuts. There is a risk of a re-acceleration of inflation in the coming months, which could result in rate cuts being lower than what the market has priced in." Swap rates released on Tuesday afternoon in New York showed that traders expect a total of 115 basis points of rate cuts by the Fed this year. This suggests that the Fed is likely to cut rates by 50 basis points at one of the remaining three meetings in 2024 starting with Wednesday's decision. The market anticipates a total of over 240 basis points of rate cuts in the next 12 months, which is highly rare outside of an economic recession. Ivascyn, who manages the $163 billion Pimco Income Fund, stated that the market would be fragile if inflation picks up. He mentioned that he is reducing exposure to the "front end of the yield curve" (1 or 2-year bonds) and favoring 5-year bonds instead. Currently, the yield on 2-year Treasury bonds sensitive to policy changes has dropped from around 5% at the end of April to 3.6%, while the yield on 5-year Treasury bonds is around 3.4%. Data compiled by Bloomberg shows that Ivascyn's fund has had an annual return rate of about 3.7% over the past five years, compared to the Bloomberg US Aggregate Total Return Index's annual return rate of 0.7%. The Federal Reserve is expected to announce its first rate cut in four years on Wednesday, and traders have already fully factored in the expectation of a 25 basis point cut, with a 55% likelihood of a 50 basis point hike. Ivascyn called Wednesday's rate decision a "high-wire act," suggesting that the magnitude of the rate cut is not as important. With the stock market near all-time highs and credit spreads "very tight," the market has already done a lot of work to ease financial conditions for the Fed. He added that this reduces the risk of policy mistakes, as the Fed has enough room to adjust the pace of rate cuts. Ivascyn said, "They may have enough tools at their disposal that even if they were wrong in a narrow sense, they can correct that if necessary and get things back on track in the market."