Rate cut hopes are 'evaporating' very quickly: Money manager

Are markets (^DJI, ^IXIC, ^GSPC) beginning to realize the reality of higher-for-longer interest rates and price in a prolonged rate environment, or are they in for more pain as the Federal Reserve could extend their rate hold?

PIMCO Head of Short-Term Portfolio Management Jerome Schneider breaks down how markets are forecasted to react in the long-term to revised interest rate projections.

"We're seeing the markets really digest that we are going to have higher rates for longer, and in doing so, we are finding that risk assets generally have tolerated it. Yields have moved higher in calibration, expecting this higher for longer mantra, and investors really should begin to think what that means for their portfolios longer term," Schneider tells Yahoo Finance. "And ultimately, what we're finding here is that yields are relatively attractive, really attractive, compared to where we've been in the longer-term..."

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Luke Carberry Mogan.

Trascrizione video

MADISON MILLS: We are going to continue to cover stocks here moving higher after over half of the S&P 500 stocks hit their one-month lows on Tuesday. That is the most since the 2023 banking crisis. And this comes after Fed Chair Jay Powell said that it could take longer than expected to tame inflation.

Investors are now repricing the likelihood of rate cuts this year with a 58% probability of rates staying at their current levels in that July Fed meeting. That is according to the CME FedWatch tool.

For more on this, we are joined by Jerome Schneider, PIMCO head of Short-Term Portfolio Management. Thank you so much for being here with us this morning.

I know that you've mentioned that there's a lot of noise in financial markets, and that's why we're seeing so much whipsawing when it comes to the data, when it comes to Fed speak. What do you make of the reaction that we've gotten to Fed Chair Powell's commentary?

JEROME SCHNEIDER: Yeah, we've come a long way over the past few months. And rationally, investors have continued to recalibrate the data that's come into the marketplace with regards to inflation and more importantly, with regard to the more-- higher than expected growth patterns that we've witnessed.

From that perspective, we actually are getting an emphatic response from the central bank here. Both Chairman Powell, as well as vice chairman Jefferson, yesterday emphatically said that we are simply seeing inflation too high in the data that they can't ultimately move to a lower benchmark rate as a result.

So the easing bias that many people had expected earlier in the year seems to be evaporating here pretty quickly. The markets have actually digested pretty well. This information, especially over the last few pieces of not only job data but also inflation data.

But from that perspective, we're seeing the markets really digest that we are going to have higher rates for longer. And in doing so, we are finding that risk assets generally have tolerated it. Yields have moved higher in calibration expecting this higher for longer mantra. And investors really should begin to think what that means for their portfolios longer term.

And ultimately, what we're finding here is that yields are relatively attractive, really attractive, compared to where we've been in the longer term. But in the near term, we're finding that there's a lot of fair value to be had in the front end of the yield curve, really, the 0 to 10 year space, to be more precise.

And in that construct, what we need to do is construct portfolios, think about the opportunity sets that the Fed has effectively afforded us because the fact that they're going to be on hold for a little bit longer than they expected.

And more importantly, when we ultimately see them begin to cut, put yourself in the position to have some price appreciation in bonds by adding a little bit of interest rate exposure to this point, given the rationalization and recalibration to the higher rate regimes that we've seen in the recent weeks.

30 basis points over the past four weeks or so across the curve is something to really be put us into that fair value range. And we think that it's an entry point for investors to begin to consider adding a little bit more to their fixed income component of their portfolios.