(Bloomberg) — Central banks in the US and Europe are signaling further interest rate increases but Mark Dowding, chief investment officer at RBC Bluebay Asset Management, isn’t buying it.
Most Read from Bloomberg
Dowding reckons the Federal Reserve and European Central Bank have probably reached the end of their policy-tightening cycles. He has loaded up longer-duration positions in US Treasuries and German Bunds, reversing his long-held bearish view on longer-tenor debt.
His position goes against recent moves in markets, which have responded to last week’s central bank meetings by amping up expectations for further rate hikes. While the Fed paused rate hikes, policymakers projected — via the so-called dotplot — that rates would move higher. That led markets to phase out rate-cut bets and wager instead on one more quarter-point hike.
Traders are pricing two 25 basis-point increases at the ECB which raised rates last week for the eighth consecutive time.
Dowding, who oversees close to $150 billion in assets, says this is precisely the reaction Fed Chair Jay Powell would have hoped for. Powell’s messaging was likely “managed to ensure markets don’t project a pivot to lower interest rates any time soon,” Dowding told clients in a note.
Bluebay has long held the market was wrong to bet on Fed rate cuts this year and Dowding’s forecast of sticky inflation has been prescient. Yet, his bearish position on Japanese government bonds has not paid off so far, while he also predicted a 25 basis-point Fed hike in June, just before its decision to pause.
Now the pause has given him the confidence to snap up 10-year Treasuries as he attempts to front-run the end of the Fed’s policy cycle. He has also added longer-duration positions in Bunds on a view the ECB is likely to hike just once more.
In addition, Bluebay has bought into positions at the front-end of the UK gilts curve, ahead of this week’s Bank of England meeting. The BOE is expected to increase rates for the 13th time, but Dowding sees money-markets’ pricing of an overall 125 basis points of tightening as wildly “over-extrapolating” the rate outlook.
“Policymakers have been uncomfortable at markets discounting rate cuts on a premature basis,” he said. “Central bankers may make more hawkish comments if it feels that markets are running ahead of themselves once again.”
Most Read from Bloomberg Businessweek
©2023 Bloomberg L.P.