Vote with your feet! Three top investment giants begin to guard against

# Source: Wall Street CN

By Long Yue

Wall Street giants including BlackRock, Pimco and Bridgewater are collectively bracing for a resurgence of inflation. Driven by rising commodity prices, the AI infrastructure boom and potential political pressure on the Federal Reserve, the 10-year inflation swap has recorded its largest gain in a year. Top institutions have even warned that inflation could rebound above 4% by the end of the year. Kevin Warsh, the nominee for Federal Reserve Chair, is set to face an **ultimate dilemma**: he must contend with intense pressure from Trump to cut interest rates while tackling mounting price pressures.

While most global investors remain under the illusion that inflation has cooled, the "smart money" on Wall Street is quietly building defenses against the impact of a new round of price surges.

According to a Bloomberg report on February 2, BlackRock, Bridgewater and Pimco are actively adjusting their portfolios to cope with potentially higher-than-expected upward pressure on prices. This concern stands in stark contrast to the mainstream market view, which still widely expects inflation to steadily return to central banks' targets worldwide.

Ben Pearson, a senior trader at UBS, bluntly stated that the US-led "inflationary boom" is the biggest underpriced risk for investors this year. He warned that if this scenario materializes, the Federal Reserve will be completely sidelined in the first half of the year, forcing the market to start repricing interest rate hikes in the second half.

## Divergent Strategies Among Wall Street Giants

Despite the widespread belief that inflation is under control, the 10-year inflation swap soared 11 basis points in January, with the breakeven inflation rate hitting a multi-month high. Faced with the specter of inflation, major asset management giants have adopted different hedging strategies:

- **BlackRock**: Tom Becker, fund manager of the firm’s Tactical Opportunities fund, said the company has been building up short positions in US and UK government bonds since the end of last year to guard against a disappointment in rate cut expectations.

- **Pimco**: Is bullish on the cushioning effect of Treasury Inflation-Protected Securities (TIPS). Michael Cudzil, senior fund manager, noted that while inflation remains above target and faces rebound risks, long-term inflation expectations are still low, making "TIPS a cheap form of insurance".

- **Bridgewater**: Prefers equities over bonds. The firm pointed out that even though AI may ultimately curb inflation by boosting efficiency, the massive short-term demand for chips, power and data has actually created a **challenging environment for bonds**.

## A Daunting Test for the New Fed Chair

Market anxiety is also focused on Kevin Warsh, the nominee for the next Federal Reserve Chair announced last Friday. Investors are trying to weigh Warsh’s long-standing reputation as an **inflation hawk** against the likelihood that he will bow to pressure to deliver the deep interest rate cuts sought by Trump.

Peter Orszag, CEO of Lazard, made a striking prediction: he believes it is not just possible, but **the most likely scenario**, that US inflation will rebound above 4% by the end of the year.

Steven Barrow, head of G-10 strategy at Standard Bank, forecast that if the White House’s desire for rate cuts is thwarted by inflation, the 10-year US Treasury yield could rebound to 5% from its current level of around 4.25%.

## Turmoil in the Global Inflation Landscape

The inflation picture is growing messy across the globe, not just in the US. In Australia, traders have started betting on a rate hike by the Reserve Bank of Australia on Tuesday as domestic prices pick up again; in the UK, rate cut expectations have been sharply scaled back on the back of strong economic data.

Even in the euro zone, where inflation has been mild for a long time, while the market still believes prices will return to the 2% target, long-term expectations are edging up as US inflation gauges strengthen.

As Simon White, Bloomberg macro strategist, put it, with inflationary pressures building on all fronts, **"Warsh faces an extraordinarily difficult task, whether defending rate cuts or holding firm to hike rates. Inaction will no longer be a viable long-term option."**

## Risk Warning and Disclaimer

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