Latest CPI supports transitory inflation: Portfolio Manager

Sonali Pier, Pimco Managing Director and Portfolio Manager, joins Yahoo Finance to discuss what the latest CPI report means for the markets.

Video transcript

ADAM SHAPIRO: Let's talk about something else people are wondering whether they should go into-- fixed income. We want to bring in Sonali Pier, Pimco's Managing Director and Portfolio Manager. It's good to have you here. And when we talk about fixed income, there are some of us who just can't break the bond habit, even when there's no yield. What does the future hold for us?

SONALI PIER: Sure, I think valuations here are relatively full. And we've seen a lot of compression. However, there's a lot of opportunity as the outlook for GDP growth is still pretty strong. Corporate earnings have been strong. And we are expecting over the next 12 to 18 months more companies that were in high yield to either return to or achieve investment grade ratings, called a rising star.

SEANA SMITH: Sonali, what about that inflation number we got this morning? CPI growth cooling, it was the slowest-- or the smallest gain, I should say-- in just around seven months. What do you think this tells us just about where we stand on inflation, and then also the timeline for tapering? Is it enough for the Fed to maybe push off that timeline a little bit?

SONALI PIER: Yeah, I think today's CPI print really helps support the Fed's view that inflation is transitory. There's a lot of uncertainty out there. And so, we are certainly watching, for example, rental prices. But the view that it's transitory as a result of the above pace goods consumption abating and turning into more services consumption or that an acceleration of productivity growth or some of the supply constraints abating will help bring inflation down next year and bring it to closer to 2.3% in 2022. It was supported by today's print.

ADAM SHAPIRO: For those of us who are amateurs when it comes to bonds, help us understand why we're watching the yield on the 10-year fall almost 3 and 1/2% today, given the kinds of issues we're looking at, the headwinds that are coming this way.

SONALI PIER: Yeah, sure, I think an inflation print that was a bit, say, lower in terms of pace after we've seen inflation pick up this year really lends itself to, as you were asking earlier, too, about the Fed, you know, our expectations are we will see probably in November, or December, a announcement around tapering and then tapering to ensue thereafter. In terms of why watch the 10-year rate, certainly, it's very important to know where it is and especially, you know, for myself as a credit investor, in terms of where credit spreads are paying up above the 10-year risk-free rate.

SEANA SMITH: Sonali, when it comes to the Delta variant, we're going to be discussing where things stand in the next block, but we're still seeing cases rise in a number of states. So they're beginning to plateau and decline maybe in some of the hot spots earlier, when it comes to the Delta variant. But we're still seeing the cases rise in a number of states. How is the market looking at this? And I guess, how should investors be viewing this risk?

SONALI PIER: Yeah, certainly it's introducing more volatility, as the Delta variant is more contagious and has picked up in terms of the number of cases and hospital capacity issues. That is actually part of why the CPI print today was a bit more moderated as a result of less air traffic, less leisure traffic and the like. And so, you know, in terms of opportunities that I still think that we feel reopening may have volatility and ebb and flow. However, that those reopening trades, over time, will be attractive.

ADAM SHAPIRO: And we're going to be watching the reopening trade, discussing it, actually, as part of our COVID segment next. But first, we have to say thank you so much, Sonali Pier, Pimco's Managing Director and Portfolio Manager. All the best to you.