US Treasury yield peak still ahead as Fed likely to tighten again, PIMCO’s Ivascyn says

US Treasury yields have reached multi-decade highs in recent weeks, indicating that the Federal Reserve may have additional room for rate hikes before the current tightening cycle concludes, according to Dan Ivascyn, chief investment officer at PIMCO, the world's largest bond manager. Speaking at the Grant’s Fall Conference, Ivascyn expects the Fed to maintain its current stance on rates during the upcoming meeting but expects one or two more rate increases before the cycle ends.

This outlook is based on the prevailing expectations of multiple Federal Reserve rate hikes within the next year driven by rising oil prices and lingering inflation concerns. Investors are pricing in these future rate hikes, which could impact risk-sensitive sectors like housing and commercial real estate, where PIMCO has observed weakening trends.

Ivascyn believes the long end of the yield curve could handle more Fed tightening since this expectation has already been priced in. However, the volatility in rate-sensitive sectors remains a concern. Regarding the upcoming Fed Chair, Kevin Warsh, Ivascyn views Warsh as open-minded regarding managing inflation, but cautions that the committee may limit his policy flexibility.

Warsh's independent stance on interest rates and the Fed's balance sheet decisions could face resistance from the committee, as he is a first-time chair eager to align with their policies. Ivascyn expects policymakers to favor further tightening until inflation trends become clearer, with Warsh potentially maintaining independence while the Fed reduces its communication frequency to navigate market expectations.