By Divya Chowdhury
MUMBAI (Reuters) – U.S. treasury yields have likely peaked, with longer-dated bonds looking attractive as the Federal Reserve is near the end of its hiking cycle, M&G Investments’ Jim Leaviss said.
“Unless we get a resurgence in core inflation from where we are now, then it should be the peak in bond yields,” Leaviss, chief investment officer for public fixed income at M&G, told the Reuters Global Markets Forum (GMF).
U.S. consumer prices rose modestly in June and registered their smallest annual increase in more than two years as inflation continued to subside.
“10 years, 20 years, really, lot further out the curve … we’ll probably see a bold steepening when people believe that the end is here for the Fed.” Leaviss said.
Leaviss said bond markets in the UK have seen more pain compared to the U.S. due to the stark difference in inflation outlook for Britain versus the rest of the world.
“The markets have hated the fact that whilst headline inflation has been coming down, as it has everywhere in the world, core inflation rate in the UK has actually been going up,” he said.
The Bank of England’s aggressive rate hikes will lead to a slowdown in economic growth and inflation, which could make a “bold case” for a buying opportunity in UK gilt markets, Leaviss said.
“The thing that makes me bullish on gilts – but more bearish on activity (and) the outlook for the UK economy – is that once those rate hikes start working … (is) the transmission mechanism through mortgages (and) rents,” he added.
Leaviss believes that as more people move to higher fixed-rate mortgages by next year, it will have a significant impact on their spending power that will bring inflation lower, and lead to the BoE cutting interest rates next year.
“I’d be surprised if the Bank of England isn’t cutting interest rates next year and maybe cutting relatively aggressively.”
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(Reporting by Divya Chowdhury in Mumbai; Editing by Frances Kerry)
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