(Bloomberg) — The US yield curve is set to invert even further, barring a rapid drop in inflation, according to Greg Peters, co-chief investment officer at PGIM Fixed Income.
Peters told Bloomberg TV he sees the yield on the two-year Treasury rising more than 100 basis points above the 10 year as inflation remains high and markets wrongly assume the Federal Reserve will soon cut interest rates.
“Inflation remains quite high, so I don’t see the scope for central banks, namely the Fed here, cutting rates in the manner that the markets are suggesting,” he said. The two-year yield last rose 100 basis points above the 10 year in early March, which was the first time since the 1980s.
Peters said investors need to ask themselves whether they think the 10-year yield will be 3.5% in three to five years, and that if the answer is no, it will be lower, they should prepare to “weather the volatility and add duration.”
“If you’re worried about a recession, then adding duration, having risk out the curve via duration, is a very good place to be,” Peters said.
There’s still a possibility the Fed will be able to pull off a soft landing with its interest rate hikes, Peters said, but turmoil in the banking sector has heightened the risk of recession. The Fed will need to maintain its credibility and keep rates high until inflation has come back down, he added.
“The theme that continues from last year into this year is one of uncertainty,” he said. The result is a challenging environment and high volatility, but that “actually creates opportunities at the same time.”
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