After nearly a decade of near-zero interest rates in the U.S., the Federal Reserve embarked on a rate hiking cycle at the end of 2015. However, despite two rate increases in 2017,
financial conditions have eased this year, as shown by PIMCO’s financial conditions index on the chart. While the easing may seem counterintuitive, the Fed’s current hiking cycle has more to do with getting away from the dreaded zero bound than it does with traditional tightening to slow an overheating economy. Thus, the Fed is taking the opportunity to gain room to manoeuvre rates without upsetting solid (if lacklustre) growth.
What it means for Investors
With the U.S. leading the way in raising rates, European investors may continue to find the higher yields of U.S. Treasuries an attractive alternative to domestic bonds. As the Fed has signalled that it will take a gradual approach, they may also want to consider Treasury Inflation-Protected Securities (TIPS) that could serve as attractively priced hedges against
upside surprises in U.S. inflation.
This content is taken from Putting Markets in Perspective, a quarterly guide to the global economy and markets highlighting PIMCO’s current investment views.
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