BlackRock's Chaudhuri Expects Two Rate Cuts This Year

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Bloomberg Jul 9 23:54 · 28.2k Views

Gargi Chaudhuri, BlackRock chief investment strategist for the Americas, expects the Federal Reserve to cut rates twice this year, once in September and then likely in December. She is on "Bloomberg The Close."

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Transcript

  • 00:00 September is likely when the feds going to begin the cutting cycle.
  • 00:03 Still in the camp of
  • 00:05 expecting two rate cuts this year.
  • 00:07 So September and December most likely,
  • 00:10 definitely Now.
  • 00:10 I was listening to your colleague from Bloomberg earlier that was talking about the data and what the feds looking at.
  • 00:15 Obviously the unemployment picture worsened significantly, much more than what the Fed or the market has expected up until now.
  • 00:23 I think you can expect the market to price in more than two cuts,
  • 00:28 but I think what the markets pricing in now around 2 seems absolutely fair to us and I think they start in September.
  • 00:34 Does that happen?
  • 00:35 So it what happens to the curve in that point in terms of the steepener,
  • 00:39 Do we get a steepener finally that's sustainable?
  • 00:41 And is it the front end that really comes down or is it the back end that gets hit harder?
  • 00:47 Yeah.
  • 00:47 So we've been talking about this for a while that, you know, there's such attractive income in the fixed income markets right now.
  • 00:53 You can get this diversified
  • 00:55 income at 6% or over that with
  • 00:58 a whole host of fixed income security
  • 01:01 securities.
  • 01:02 But where you source that duration is important.
  • 01:05 And we've been on the camp that you want to source that
  • 01:08 in the belly of the curve for now
  • 01:10 expecting the curve to steepen out.
  • 01:12 We've seen a little bit of that steepening of course,
  • 01:15 but I would imagine as there is more concerns around the fiscal deficit or if there's more concerns around,
  • 01:22 you know just the amount of supply that's coming into the market, I think we can certainly see bouts of steepening.
  • 01:28 And eventually for us to get a lot more positive on the very long end of the yield curve, we'd have to see a positive term premium return to the market.
  • 01:37 For now,
  • 01:38 if you can clip 6% or so quality high coupon in the fixed income market with you know, we like owning investments such as BlackRock Income ETF, why not do that and clip that coupon?
  • 01:51 I am curious.
  • 01:52 So on the term premium side, Gargi, I mean how much of that is sort of still correlated with what the Fed is doing or or or may do I should say?
  • 01:59 Or are there other factors here that have driven that premium to where it is
  • 02:03 or lack of it?
  • 02:04 Yeah, So you know, historically, absolutely.
  • 02:06 It's a great point.
  • 02:06 Historically, when we think about what drives different parts of the yield curve, obviously you have your growth and policy and all of that driving sort of the very front end.
  • 02:15 Then you have other factors that drive the very long end.
  • 02:19 So if you're looking at anything that's 10 plus, obviously it's growth in inflation too.
  • 02:23 But you do have concerns around supply, concerns around deficit, which is why investors will demand a higher return and you're not getting that right now.
  • 02:33 Right now, why would you,
  • 02:35 you know, sort of
  • 02:36 stick around for another extra 25 years while getting less yield for those extra 25 years?
  • 02:42 So I think a lot of this is on valuations and the drivers of the long end are related to demand, supply and deficits like we talked about, which are all pointing to a little bit of a steep nerve further from here.