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September 21, 2006
Pimco's Take On Rates
Pimco the big bond fund manager is very focused on interest rates. They mean all the difference in the bond world. Lately the firm has also been watching the housing markets. If housing markets crash, it could mean that the Federal Reserve needs to lower rates again. But Pimco's chief Fed-watcher, Paul McCaulley, doesn't think that's happening any time soon. In a recent note to investors, McCaulley describes the new home builder industry (companies like KB Home and Lennar) as being in a recession. In the existing home market (85% of home sales are existing homes) McCaulley sees rising inventory and more layoffs of folks in the "closing costs" side of the industry--Realtors, mortgage brokers and the like. For this reason Pimco is taking its estimate of Gross Domestic Product growth down from as high as 3.25% earlier this year to about 2.25% today. McCaulley doesn't think that's enough of a slowdown for the Fed to start lowering rates again. So the Pimco rate forecast is flat, not rising, interest rates.
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