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U.S. bond manager PIMCO said on Tuesday it was too early to declare victory over inflation and that recession risks persist, despite market expectations for a so-called soft landing for the American economy as the Federal Reserve looks to cut interest rates this year.

The company said in a note it expects bonds to outperform stocks in 2024 should there be a recession and, given starting high yields, to provide a cushion in case of a reacceleration in inflation.

Still, after a rapid rally in bonds at the end of last year spurred by expectations that the Fed will cut rates as inflation cools down, PIMCO said it was neutral on so-called duration – a measure of a fixed income portfolio’s sensitivity to changes in interest rates.

“At this point, we don’t see duration extension as a compelling tactical trade,” Tiffany Wilding, an economist, and Andrew Balls, chief investment officer for global fixed income at PIMCO, wrote in the note.

“We expect to be broadly neutral on duration after the most recent bond-market rally, which has brought global yields back in line with our expected ranges, and amid the shifting balance of inflation and growth risks,” they said.

Benchmark U.S. Treasury 10-year yields, which move inversely to prices, have declined sharply in recent months, from over 5 per cent in October to about 4 per cent as of Tuesday.

Going forward, long-term bonds could be affected again by concerns over widening U.S. fiscal deficits and increased government bond issuance. Such worries contributed to a selloff of long-term bonds last year, before rate cut expectations injected optimism into the market.

“We see potential for further bouts of long-end curve weakness amid anxiety about elevated supply, as occurred in late summer, stemming from the increased bond issuance needed to fund large fiscal deficits,” PIMCO said.

It said it favours government bond maturities of five to 10 years and is “underweight” the 30-year area.

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