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‘Normal’ rates are different this time: Pimco

Central banks' efforts to return to normal interest rates will be slower and lower than in the past, Scott Mather, deputy chief investment officer at Pimco, told CNBC.

"We have slower growth as well as an overhang of debt," Mather said. "That means (central bankers') journey to a normal policy rate is also going to be very slow and the destination is going to be much lower in terms of a neutral rate relative to what we're used to in the last couple of decades."

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He expects central bankers will aim toward zero percent real policy rates, compared with the current negative real rates, well below "normal" real rates of around 2 percent, with a 4-5 percent nominal policy rate, that were common in decades past.

Pimco, which has nearly $2 trillion under management, has dubbed its outlook the "new neutral," and it's the reason its funds are betting on five-year U.S. Treasurys, he said.

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Richard Cano | E+ | Getty Images

The U.S. Federal Reserve is likely to allow inflation to exceed its 2 percent target, which it may hit by year-end, Mather said. At the same time, the Fed, which is currently the biggest buyer of the longer-dated bonds, will likely cease its purchases by October, he noted.

All that should spell a decline in the demand and prices for 10-year and 30-year Treasurys, with yield moving inversely to price.

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"The yield curve can steepen as inflation heads up and the market demands some sort of additional risk premium for the Federal Reserve allowing inflation to go above target in the years ahead, while the short end of the yield curve is anchored by that zero percent policy rate," Mather said.

"There are higher capital gains and more safety in having most of our bond exposure shorter in maturity," he said.

At the same time, Mather tipped taking bets on global bond plays. "There's lots of relative value in regional differentiation themes," he said, adding while the days of double-digit bond returns are gone, he expects to beat inflation by several percentage points.

Pimco's view that rates will remain lower for longer is gaining traction among other analysts as well.

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"The neutral rate level has likely declined due to a fall in the potential growth rate," Deutsche Bank said in a note Tuesday. But it does expect U.S. rates could rise in the short term.

While the Fed is tapering its asset purchases, investors who haven't purchased until now are returning, supporting long-end demand, it noted, but it added, "private-sector investors' buying capacity should also decline at some point" once the taper is finished.

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Deutsche Bank also expects the market will begin focusing on potential rate hikes once the Fed has finished tapering.

"We wonder how many market participants will be sure that the neutral rate is lower than in the past in absolute terms when rates are hiked," it said.

In addition, "the low neutral rate argument will likely be temporarily undermined if the inflation rate rises."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1