Blackrock strategist's stance on short-term US Treasuries has changed from overweight to underweight, stating that the market's bet on the magnitude of the Fed rate cut is unlikely to materialize.
The market speculates that the Fed has waited too long for easing, and will now be forced to cut rates at a faster pace to support the economy. However, the company's chief investment strategist Wei Li believes this speculation is wrong. She expects the Fed to cut rates by 25 basis points on Wednesday.
"We believe the market has somewhat overpriced the depth of the rate cutting cycle," Li said. "The rate cutting cycle is underway, but the magnitude may not be as large as the market expects."
The two-year government bond yield, which is sensitive to policies, approached its lowest level since September 2022 on Monday, and the rise in US bonds is not tempting to Li.
The strategist favors medium-term US bonds, specifically 5-10 year bonds, because they have relatively higher yields.
Although she acknowledges the risk of an economic downturn may be increasing, she maintains that her baseline scenario is that the US economy will slow down rather than contract. At the same time, she points out that policymakers are still concerned about inflation "persisting" in certain sectors of the economy.
"Over the past six months, the average number of jobs created is still 0.164 million," she said. "Such pace is still relatively strong."