(Bloomberg) --State Street Global Advisors is betting against the higher-for-longer mantra sweeping across global bond markets.
The Wall Street giant is wagering that the Federal Reserve will cut interest rates by at least a full percentage point next year — double what markets are pricing in — as policy makers respond to further slowing in growth and inflation.
"The Fed fund rate needs to drop pretty dramatically next year," Lori Heinel, Boston-based chief investment officer at the firm, said in an interview. "We think at least four rate cuts — so 100 basis points and maybe as much as 200."
The $3.6 trillion asset manager has bought more longer-dated Treasuries in anticipation, she said.
Heinel contends that the Fed is done with its hiking cycle and that policy is restrictive enough, given the lag with which tightening filters through. On this basis, she forecasts the US economic growth slowing to 1.1% next year, with the inflation rate moderating to just below 3%.
"That will give us room to get longer yields back to a more appropriate risk premium," she added. "We are buyers of rates here, there's good value."
The contrarian view counters the higher-for-longer expectations dominating markets, which led traders to pare bets on next year's Fed rate cuts from 150 basis points a couple of months ago to half-a-point now.
The shift in narrative sparked a fierce selloff in long dated bonds and drove yields to multi-year highs, with the US 30-year rate reaching the highest level since 2007 on Tuesday.
BlackRock Inc.'s Larry Fink, Pershing Square Capital's Bill Ackman and JPMorgan Asset Management's Bob Michele are among those seeing higher yields as here to stay. The Fed's dot plot shows the median year-end policy rate projection to be slightly higher from today's 5.5% level, at 5.6%.
State Street continues to hold nearly 10% of funds in cash, but is leaning toward buying more bonds. It has been adding to its overweight position in long-duration Treasuries, while remaining overweight in US equities.
Even with the economy slowing, Heinel sees relatively resilient consumer demand helping to buoy Wall Street stocks. Meanwhile, she has switched to underweight on European equities, given the region's energy vulnerability and maintains a negative outlook on Asia, considering China's disappointing post-pandemic recovery.
"We're going to see a slowing environment and central bankers are going to finally feel like they've done enough," she said. "That will give rates room to run the way that we think they should."
