TOKYO The money management arm of U.S. insurer Prudential Financial (PRU.N) does not see further rises in U.S. bond yields, despite solid U.S. growth, given global political risks and strong foreign appetite for U.S. bonds, its chief executive said.
David Hunt, responsible for $1 trillion assets PGIM manages, said that while the U.S. economy is doing well, financial markets had overreacted to hopes of a further boost from stimulus plans by U.S. President Donald Trump.
"I would say we are an outlier. We don't see that rates will go up," Hunt said, challenging a wide spread view that the 10-year U.S. Treasuries yield should rise as the Federal Reserve is expected to bump up interest rates.
The New Jersey-based firm believes the 10-year Treasury yield US10YT=RR, now at 2.34 percent, will slip to 2.25 percent by year-end even as it expects the Fed will hike rates twice more in 2017.
"There are big macro risks in the economy, largely from political events such as the elections in Europe and a missile launch by North Korea," he said.
PGIM has reduced its risk exposure to around 75 percent of its internal limit recently after having kept it near maximum levels in the last two years, Hunt said.
He also pointed out that there is "remarkable demand" for Treasuries from foreign investors.
"This (past) quarter, we had $300 billion of new issuance in the United States, an absolute record for a quarter, and you can't buy a bond. It is absolutely tight, because a lot of Japanese and Europeans are coming. The global desire for yield remains very strong," he said.
The U.S. 10-year yield had risen to a two-year high of 2.64 percent in mid-December -- almost double its record low of 1.32 percent touched in July -- on expectations that Trump's pro-business policies will boost U.S. growth and inflation.
"The market did probably overreact to what they thought was going to happen under President Trump... And now, we would say that reality is starting to sink in," he said.
Hunt noted that investors need to heed "a very large discrepancy between what Donald Trump says and ultimately what the administration policy turns out to be."
"I'm an engineer by training, so we call this problem 'the noise-to-signal ratio.' It is very high (now)," the Newark-based CEO added.
(Reporting by Tomo Uetake; Editing by Kim Coghill)