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IPE special report May 2018

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PIMCO warns of sustained periods of uncertainty in fixed income market

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Investors will need to adjust to more frequent periods of market uncertainty, the head of PIMCO’s European operation has warned.

Andrew Balls, a deputy CIO at the Allianz Global Investors-owned asset manager, said he believed the recent market uncertainty caused by the tapering of the US Federal Reserve’s quantitative easing (QE) was simply a sign of things to come.

“We had this [market turbulence] last year around the taper[ing], we had it around emerging markets,” he said at a briefing summing up PIMCO’s longer-term market views. “We think you’re just going to get more bouts of market turbulence – we should get used to it.

“This is the natural thing to happen if the market makers aren’t making markets.”

Balls noted that the instability would also be triggered by market participants re-thinking their investments, or events such as hedge funds speculating – which was last week believed to be behind an increase in Italian government yields.

He added: “Fixed income markets, in a way, look a bit more like equity markets. So, over time, there should be good opportunities for us to absorb risk, when you get these temporary dislocations.”

The deputy CIO also predicted the European Central Bank (ECB) would eventually undertake its own QE programme.

He said ECB president Mario Draghi had made clear how the bank viewed its role in reacting to immediate liquidity concerns versus inflationary pressures.

“If they take the inflation target seriously, it seems there is a pretty good chance they’ll do quantitative easing,” Balls said. “Maybe they’ll try to do it via private sector assets, but that seems pretty impractical, so it’s likely they’d do government bonds.”

Balls’s colleague Mike Amey, a managing director and portfolio manager in the firm’s London office, also expressed concerns about the low levels of inflation seen within the euro-zone.

“We’ve been stuck at below 1% inflation for some time,” he said. “We think it would drift up over time, particularly if the ECB does QE. But there is real risk of expectations becoming entrenched for lower inflation.”

Amey later added that the low inflationary rate would pose a problem if a shock to the euro-zone were to occur.

“We think we’ll eventually get back above 1.5, but having the probability of inflation getting stuck at about 1% is non-trivial.”

According to the most recent data from Eurostat, euro-zone annual inflation stood at 0.7% in April, an increase from 0.5% in March – both well below the ECB’s stated target of 2%. 

Amey said: “In terms of the credibility of the [ECB’s inflation] target, respectful of the difficulty of managing a committee, if you take seriously a target of close to 2% inflation, you should be responding if three years out you still have inflation so low.”

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