(Bloomberg) -- The bond market is at risk of leaning too heavily toward interest-rate cuts next year as “the inflation problem is far from being solved,” according to Daniel Ivascyn, chief investment officer at Pacific Investment Management Co.

Ivascyn, who helps steer the roughly $126 billion Pimco Income Fund, the largest actively managed bond fund, spoke Tuesday after a report showing US inflation broadly cooled last month. The data unleashed a sweeping fixed-income rally that extended this month’s advance in Treasuries and fueled bets that the Federal Reserve will pivot to lowering rates by mid-2024.

While relishing the boost to Pimco’s performance from the strength in bonds, which has erased the Bloomberg US Aggregate Index’s decline for 2023, Ivascyn warned “it’s going to be a bumpy journey” to see inflation truly moderate toward the Fed’s goal.

“Moving in the right direction is different than getting to the central bank target of 2%, give or take,” he said in an interview at Pimco’s headquarters in Newport Beach, California.

In trading Wednesday, 10-year Treasury yields rose 9 basis points to 4.54%, after touching the lowest level since September. Fresh data suggested consumer demand was resilient heading into the holiday season, while US producer prices declined the most since 2020.

Pimco’s $51.1 billion Total Return Fund has gained 2.2% in the past month, leaving it up 1.1% for 2023, data compiled by Bloomberg show. The Income Fund, which Ivascyn co-manages with Joshua Anderson and Alfred Murata, has gained 2.1% in the past month for a 4.9% return in 2023. On a three-year basis, its 0.5% annualized gain is better than 88% of rivals, according to data compiled by Bloomberg. The return highlights the brutal stretch bond managers have gone through, after the market posted a historic loss in 2022.

If Ivascyn is right, the extent of the bond market’s gains and speculation that the Fed’s next step is to ease as soon as May could prove misplaced, especially given the central bank’s determination to restore price stability.

Last week, Fed Chair Jerome Powell said “inflation has given us a few head fakes.” The Fed “will continue to move carefully,” and “address both the risk of being misled by a few good months of data, and the risk of overtightening,” he added.

‘Enthusiasm’ Risk

Now in his 25th year at Pimco, Ivascyn, 54, said “there’s a risk that there’s going to be a little too much enthusiasm around around rate cuts next year. The central bank’s going to be very careful in cutting rates unless they see meaningful economic weakening, just because the inflation problem is far from being solved.”

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon echoed that caution Tuesday, saying people were over-reacting to short-term numbers, and “inflation might not go away that quickly.”

For Ivascyn, the upshot is that he’s ready to trim Pimco’s interest-rate exposure if bonds rally too far, after the firm had “let our interest-rate risk go up as rates increased” last month to multi-year highs. 

Pimco’s approach as it oversees $1.74 trillion in assets, is looking out over a two- to three-year time frame, Ivascyn said. 

“The short term is noise.”

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