Walsh's “silent” era is coming, PIMCO indicates the best safe haven for volatile markets: 5-10 year US bonds

The Zhitong Finance App learned that at a time when the new Federal Reserve Chairman Walsh completely abandoned forward-looking guidance and the market entered a new paradigm of “data dependency,” Pacific Investment Management Company (PIMCO), the world's largest active bond management company, gave a clear allocation direction — 5 to 10 year US Treasury bonds.

Andrew Balls, head of PIMCO's fixed income business and responsible for overseeing PIMCO's assets of about 2.3 trillion US dollars, recently said in an interview that out of the various periods of the US Treasury yield curve, the “stomach curve” for a period of 5 to 10 years can best withstand the fluctuations caused by the Federal Reserve's shift to “reducing forward-looking guidance.”

Balls anticipates that as Walsh gradually abolishes the forward-looking guidance system previously used by the Federal Reserve to suggest interest rate trends, there will be more turmoil in the US bond market. At the same time, fluctuations in oil prices and trade tensions have also made economic data more unstable. He believes that short-term US bonds will bear the brunt of fluctuations, and at current yield levels, slightly longer term bonds are more attractive — especially at the level of “real” yields adjusted for inflation.

“I think the 5 to 10 year period looks pretty good on the overall yield curve,” Balls said. “In the long run, yield is an effective measure of return. Currently, the nominal yield and actual yield on US bonds are very attractive.”

Walsh “says goodbye to forward-looking guidance”, and the market enters an era of data striving

According to information, Walsh quickly implemented policy framework reforms after taking office. On July 1, he clearly announced at the ECB's annual central bank forum in Sintra, Portugal, that the Federal Reserve will no longer provide forward-looking interest rate guidance and will instead rely entirely on the latest economic data for conference-by-meeting decisions. He stressed that forward-looking guidance “is not the right policy tool in the current economic situation.” At the FOMC meeting in June, Walsh even refused to submit personal interest rate forecasts (bitmaps), saying “the bitmap is drawn with a pencil and can be erased.”

The shift has sparked widespread concern on Wall Street. Investors worry that abandoning forward-looking guidance will force them to rely more on economic data to determine the Federal Reserve's policy path, and the fluctuation in US bond yields may increase significantly.

Balls also acknowledged that this may indeed bring more uncertainty, but his attitude is quite pragmatic: “I think it's like the weather. There's no point in complaining; you can only adapt. From my point of view, it makes perfect sense not to provide too much forward-looking guidance in the current environment. Look at what happened in the past week or two — why provide so much forward guidance in such an uncertain environment?”

Inflation data has cooled sharply, and the probability of interest rate hikes in July plummeted

Balls's basic judgment is that the Federal Reserve will keep interest rates unchanged this year, but it is also expected that the central bank will act if necessary. This judgment was strongly supported after the release of US inflation data for June on Tuesday.

According to the data, the US CPI rose 3.5% year on year in June, lower than market expectations of 3.8%, and clearly down from the previous value of 4.2%; it fell 0.4% month-on-month, the first month-on-month decline since 2020. The core CPI rose 2.6% year over year, which was also lower than the forecast of 2.8%.

This better-than-expected inflation data has cooled the market's expectations of the Fed's interest rate hike. The interest rate swap market showed that the probability of interest rate hikes in July plummeted to about 20% from about 46% previously. CME's FedWatch tool shows that the market expects a marked increase in the probability that the Fed will keep interest rates unchanged in July.

Vash congressional hearing: “zero tolerance” for high inflation but refuses to disclose policies in advance

Despite the fact that the inflation data cooled down more than expected, Walsh sent a tough signal during the semi-annual monetary policy hearing of the National Assembly from July 14 to 15. In his written testimony, he promised “zero tolerance” for five years of high inflation, stressing that the Federal Open Market Committee “will never tolerate prolonged high inflation.”

Walsh downplayed the importance of monthly inflation data and bluntly stated, “Some people look at this morning's data and claim that the task is complete and everything is fine. I definitely don't agree with this view.” At the same time, he continued his consistent communication strategy and declined to say in advance whether the July meeting would raise interest rates or stay on hold.

This “tactic of silence” has also sparked growing discontent. Michael Feroli, the chief US economist at J.P. Morgan Chase, warned that if Walsh continues to remain silent, he may hand over the Federal Reserve's communication leadership to other policymakers.

Focus on the British market: if Miliband becomes finance minister, he won't sell British bonds

In addition to US debt, Balls is also closely monitoring the British treasury bond market. British politics is about to usher in a power transition — Andy Burnham (Andy Burnham) is expected to officially replace Stammer as Prime Minister of the United Kingdom on July 20. The market is paying close attention to its Chancellor of the Exchequer.

Energy Secretary Ed Miliband (Ed Miliband) was once the biggest hit, but recent reports suggest Home Secretary Shabana Mahmood (Shabana Mahmood) may have overtaken it. Some market participants worry that if Miliband becomes Chancellor of the Exchequer, it may mean that the policy focus is shifting from fiscal restraint to more active government spending. Previously, asset management company Rathbones sold British Treasury bonds because it feared that the Burnham administration would “repeat the Truss mistake.”

However, Balls said that even if Miliband is appointed Chancellor of the Exchequer, he will not sell British debt. “Measuring a finance minister requires a combination of factors, including economic policy, ability to administer, familiarity with the system, courage to lead the Ministry of Finance, and market perception,” Balls said. “Among these core dimensions, I think he has performed very well at least two.”