Pimco says Fed unlikely to raise rates this week

Asset manager believes rate increase will come before the end of the year, but not in September

PUBLISHED : Tuesday, 15 September, 2015, 10:46pm
UPDATED : Tuesday, 15 September, 2015, 10:46pm

Pacific Investment Management Co, one of the world's largest asset managers, puts a "below 50 per cent chance" the Fed will raise short-term interest rates this week, Pimco Group chief investment officer Dan Ivascyn said on Monday.

Ivascyn said Pimco believes the US central bank's first rate rise in nine years will come before the end of the year, but not in September.

"The decision this week will be close," he said. "Global weakness, uncertainty around consumer sentiment, inflation still running below target are reasons the Fed will not move this week."

Pimco held its quarterly forum last week. Pimco managing directors as well as senior advisers discussed trends for economies and markets over the next 12 to 18 months.

Ivascyn's views are widely followed as he helps Pimco oversee assets that totalled more than US$1.52 trillion as of June 30, mostly in fixed-income securities. Pimco is a unit of Munich-based Allianz.

The recent market turmoil, stemming from China's currency devaluation, has called into question the Fed's long-telegraphed plans to raise rates from near zero this year, possibly as soon as tomorrow.

As of the end of August, the firm's US$98.1 billion Pimco Total Return Fund had over 50 per cent of its assets in mortgage-related assets and 19.19 per cent in US-government related securities.

The fund also had 28.87 per cent of its assets in emerging markets and 9.50 per cent in investment-grade corporate credits and 5.40 per cent in high-yield "junk" bonds.

The US-government category may include nominal and inflation-protected treasuries, Treasury futures and options, agencies, FDIC-guaranteed and government-guaranteed corporate securities, and interest rate swaps.

Pimco Total Return fund's short-duration instruments - which are commingled liquidity funds, uninvested cash, interest receivables, net unsettled trades, broker money, short duration derivatives and derivatives offsets - stood at negative 23.05 per cent.

In having a so-called negative position in these cash equivalents and money-market securities, it is an indication of derivative use and short-term securities being put up as collateral as a way to boost leverage and increase the fund's holdings in bonds with longer maturities such as MBS, Treasuries and corporate bonds.

The Pimco Total Return Fund is posting returns of 0.72 per cent so far this year as of August 31, surpassing 85 per cent of its category, Morningstar said.