NEW YORK (Reuters) – Dan Ivascyn, group chief investment officer at Pacific Investment Management Co, said on Wednesday that late-cycle deficit spending “increases the risk of an eventual hard landing for the U.S. economy by forcing the Federal Reserve to be more proactive.”
In March, Fed officials, meeting for the first time under Chairman Jerome Powell, raised the benchmark lending rate a quarter-point and forecast a steeper path of hikes in 2019 and 2020, citing an improving economic outlook. Policy makers continued to project a total of three increases this year.
Speaking to Reuters, Ivascyn, who helps oversee over $1.75 trillion at Pimco, also said of a prospective trade war with China: “A more aggressive trade war is not necessarily bad for high-quality bonds as it will likely lead to a weaker business environment and even lead to reduced household confidence which in turn mean a weaker economic backdrop. You could see a flight-to-quality into bonds under this scenario.”
Pimco is one of the world’s largest bond managers and Ivascyn’s views on global credit and world economies are closely followed. On Tuesday, the Trump administration published a list of about 1,300 Chinese exports – worth about $50 billion annually – that it intends to target with 25 percent tariffs. China responded on Wednesday, with its Ministry of Commerce announcing plans to impose its own 25 percent tariff on $50 billion worth of U.S. exports. The 106 affected products will include aircraft, cars and soybeans.
Ivascyn said about trade-war fears: “Most of what is occurring, thus far, is symbolic. Although the rhetoric is fierce, the specific actions have been measured thus far … whether it’s planes or cars the actions appear to send a warning more than creating an immediate impact on trade flows.”
Ivascyn said China, which owned $1.17 trillion of Treasuries at the end of January, could use it as leverage during trade negotiations: “A country’s investment policy around reserves is yet another tool to send signals and messages. But at Pimco, we think that all of this is mostly noise thus far.”
Pimco Income, overseen by Ivascyn and managing director and portfolio manager Alfred Murata, is No. 1 in its category with annualized returns of 9.12 percent over the last 10 years ended April 3. Over the same period annualized, the Pimco Income fund has surpassed the benchmark Bloomberg Barclays U.S. Aggregate Bond index by 3.95 percentage points.
Reporting by Jennifer Ablan; Editing by Susan Thomas and Tom Brown