Federal Reserve building in Washington. Federal Reserve building in Washington. (Photo: iStock)

Last year’s change of heart — or direction — for the Federal Reserve, that is, its decision to halt raising interest rates, had less to do with President Trump’s tweeting and more to do with deteriorating economic data, said Chris Nicholson, vice president, product management at PGIM Investments, who told ThinkAdvisor the company sees growth for 2019 at 2.5%, down from 2018’s 3%.

“That’s still pretty good,” he said. “In our mind with the Fed becoming more dovish … that has been more beneficial, number one, for interest rates coming down, and number two, for what we would call a spread product. It’s worked well this year for high yield bonds, emerging markets, corporate credit — anything where there is a premium above Treasuries has done well.”

He doubts Trump’s comments had anything to do with the Fed’s pivot, and may have actually caused it to be more “defiant to hear the president remarking on things that traditionally have been outside the scope of the administration. In many ways, it actually may have had the Fed hold on too long in terms of their view. It’s on the opposite end, which was, ‘we are not going to bend towards political influences.’”

Overall there isn’t “an inflation problem,” Nicholson said, and the Fed “is actually in kind of this sweet spot where growth looks pretty good.” He added that “we feel really good about [2.5% growth as we believe] a recession is an extraordinary low probability.”

PGIM, which is the global investment business of Prudential Financial, manages over $1.2 trillion, with it’s fixed income business about $770 billion. PGIM Investments manufactures and distributes retail products for the firm, bringing “institutional quality” to the retail public in the form of mutual funds, ETFs and UCITs.

Regarding the flattening yield curve, Nicholson says that PGIM Fixed Income doubts it’s signaling an inversion, rather, “people who are investing in longer parts of the bond market are thinking about what’s going to happen over the next five, 10, 20, 30 years,” he said. “And they clearly think that interest rates will be lower than higher.”

PGIM Fixed Income sees good relative value now in high quality structured products, like AAA-rated commercial mortgage backed securities or AAA-rated collateralized loan obligations.’

Another trend he noted is “under performance of agency mortgage-backed securities, like Fannie Mae and Freddie Mac backed securities. As the Fed has signaled that in September 2019  they are going to stop shrinking the balance sheet, they are going to continue to let all agency mortgage backed securities mature,” he explained, and then reinvest the principle proceeds into Treasuries. Thus they are slowly unwinding their mortgage position and “that’s going to slowly lead towards wider spreads,” he said.

He added that “When you study historical hiking cycles of the Fed, anytime there has been a pause in the hiking cycle, four out of four times within 15 months the Fed’s next move was actually a cut in rates.”

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