Hurricanes Irma and Harvey and the possibility of a debt ceiling face-off later this year are reducing the chances of a rate hike by the Federal Reserve in December, according to Dan Ivascyn, group chief investment officer at Pacific Investment Management Co.
“We do think it’s going to have an impact on growth, on GDP,” Ivascyn, whose firm oversees more than $1.6 trillion, said in a telephone interview from his office in Newport Beach, California. “We think it will initially lead to lower likelihood of the Fed moving in December.”
The implied probability of a rate hike in December is about 29%, according to data compiled by Bloomberg. The Fed has raised its benchmark rate twice this year and was expected to increase one or two more times, based on projections of members of the Federal Open Market Committee.
President Donald Trump and Congress this week reached a deal to suspend the federal debt limit and fund the government into December, raising the stakes for a year-end budget battle.
Hurricane Irma weakened slightly to a Category 4 storm and remained on a collision course with southern Florida after devastating a chain of Caribbean islands. Two other hurricanes, Jose and Katia, are also churning in the Atlantic basin.
“There’s the risk this is just the beginning of a series of storms,” Ivascyn said. “We’re not even close to the peak of the season just yet.”
Ivascyn and Alfred Murata co-manage the $95.9 billion Pimco Income Fund, which has outperformed 99% of its Bloomberg peers with an average annual gain of 7.4% over the past five years.
One possible investment opportunity down the road is insurance-related, because of what behavioral finance economists refer to as the “recency effect,” which leads people to increase coverage after adverse events, he said.
“It’s like if you have a car accident, you tend to call everyone in your family and say ‘make sure your auto policy is up to snuff’ kind of thing,” he said.
Pimco recommends becoming more defensive in the current environment of investor complacency by reducing exposure to high-priced assets, such as high-yield debt, Ivascyn said. The firm expects continued low inflation, modest U.S. growth and strength in Europe but no recession in the near-term.
“We’re still talking about fine tuning, not doing massive trades on any of this stuff,” Ivascyn said.
— Check out Pimco, T. Rowe Price Warn Investors: ‘Time to Reduce Risk’ on ThinkAdvisor.