The era of "silence" in Washington is coming. PIMCO identifies the best safe haven in a volatile market: 5-10 year US Treasury bonds.

At a time when the new chairman of the Federal Reserve, Powell, completely abandons forward guidance and the market enters a new paradigm of "data dependency," the world's largest active bond management company, Pacific Investment Management Company (PIMCO), has given a clear allocation direction - 5 to 10-year US Treasury bonds. Andrew Balls, head of fixed income at PIMCO and in charge of overseeing approximately $2.3 trillion in assets under PIMCO, recently stated in an interview that among the various maturities of the US Treasury yield curve, the "belly" of the curve of 5 to 10 years can best withstand the volatility brought about by the Fed's pivot towards "reducing forward guidance." Balls expects that with Powell gradually abolishing the Fed's forward guidance system used to indicate interest rate movements, the US bond market will experience more volatility. At the same time, fluctuations in oil prices and trade tensions have made economic data more unstable. He believes that short-term US bonds will bear the brunt of the volatility impact, and at current yield levels, slightly longer-term bonds are more attractive - especially in terms of "real" yield after adjusting for inflation. "I think the 5 to 10-year segment looks quite good across the yield curve," Balls said. "In the long run, yield is an effective indicator of returns, and the nominal and real yields of current US bonds are very attractive." Powell says goodbye to forward guidance, market enters data-dependent era It is understood that after taking office, Powell quickly implemented policy framework reforms. On July 1, he announced at the annual central bank forum hosted by the European Central Bank in Sintra, Portugal, that the Fed will no longer provide interest rate forward guidance and will instead rely entirely on the latest economic data for gradual meeting decisions. He emphasized that forward guidance is "not the right policy tool under the current economic conditions." At the June FOMC meeting, Powell even refused to submit personal interest rate forecasts (dot plot), stating that "the dot plot is drawn in pencil and can be erased." This shift has sparked widespread concern on Wall Street. Investors are worried that abandoning forward guidance will force them to rely more on economic data to assess the Fed's policy path, and the volatility of US bond yields may significantly increase. Balls acknowledges that this could indeed bring more uncertainty, but his attitude is quite pragmatic: "I think it's like the weather - complaining is pointless, you just have to adapt. From my perspective, it is completely reasonable not to provide too much forward guidance in the current environment. Just look at what has happened in the past week or two - in such an uncertain environment, why provide a lot of forward guidance?" Inflation data cools significantly, probability of interest rate hike in July drops sharply Balls' basic assessment is that the Fed will keep rates unchanged this year, but he also expects the central bank to take action when necessary. This assessment was strongly supported after the release of US inflation data for June on Tuesday. The data shows that US CPI rose 3.5% year-on-year in June, lower than the market's expectations of 3.8%, significantly down from the previous value of 4.2%; and fell 0.4% month-on-month, the first monthly decline since 2020. Core CPI rose 2.6% year-on-year, also lower than the expected 2.8%. This better-than-expected inflation data has cooled market expectations for a Fed rate hike. The probability of a rate hike in July, as indicated by the interest rate swap market, plummeted from about 46% to about 20%. The FedWatch tool from the CME Group shows that the market expects a significantly increased probability that the Fed will keep rates unchanged in July. Powell congressional hearing: "zero tolerance" for high inflation but refusal to reveal policy in advance Despite the unexpectedly moderated inflation data, Powell sent a tough signal at the semi-annual monetary policy hearing in Congress on July 14-15. In his written testimony, he pledged a "zero tolerance" for high inflation that lasts five years, emphasizing that the Federal Open Market Committee "will not tolerate persistently high inflation." Powell downplayed the importance of single-month inflation data, bluntly stating, "Some people see the data in the morning and declare the job done, all is well. I strongly disagree with this view." He continued his usual communication strategy, refusing to reveal in advance whether the Fed would raise rates or stand pat at the July meeting. This "silent strategy" has also sparked increasing discontent. Michael Feroli, chief US economist at JPMorgan, warned that if Powell continues to remain silent, he may hand over the Fed's communication leadership to other policymakers. Focus on the UK market: Even if Miliband is appointed Chancellor, he will not sell UK bonds In addition to US bonds, Balls is also closely monitoring the UK bond market. The UK political arena is about to witness a power transfer - Andy Burnham is expected to officially succeed Stammer as Prime Minister on July 20. The market is closely watching the appointment of his Chancellor. Energy Minister Ed Miliband was once the top favorite, but recent reports indicate that Home Secretary Shabana Mahmood may have overtaken him. Some market participants are concerned that if Miliband becomes Chancellor, it may mean a shift in policy focus from fiscal constraints to more active government spending. Asset management company Rathbones had previously sold UK bonds out of fear that a Burnham government would "repeat the mistakes of Trass". However, Balls stated that even if Miliband were appointed Chancellor, he would not sell UK bonds. "Assessing a Chancellor requires considering multiple factors, including economic policy, governance abilities, familiarity with the system, the courage to lead the Treasury, and market sentiment," Balls said. "In these core dimensions, I think he has shown standout performance in at least two."