One of Europe’s biggest asset managers is betting markets are wrong to expect the Federal Reserve to cut interest rates this year.

Pictet Asset Management SA is shorting rates futures in a wager they’ll fall in coming months as the Fed is unable to lower borrowing costs because of persistent inflation. Andres Sanchez Balcazar, its head of global bonds, believes market pricing for policymakers to reverse course and start cutting rates in September is “extreme.”

“It might be very, very difficult for the Fed to very quickly cut rates unless something terrible happens. And at the moment, that’s not the case,” Balcazar said in an interview. “That’s why we think it would make sense to be short some of those money market contracts that seem a bit too optimistic about cuts.”

Pictet, with around $680 billion of assets, has positioned for this mainly by selling Secured Overnight Financing Rate (SOFR), futures that reflect where investors see the cost of overnight borrowing in September and December. These contracts have rallied in recent weeks as money markets expect 50 basis points of rate cuts in 2023.

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The position compliments a bigger strategy held by Pictet, as well as a growing number of investors including Amundi Asset Management, of betting the US yield curve will gradually steepen if the Fed starts cuts next year. These funds are buying Treasuries with maturities around five and 10 years, while selling 15- to 30-year bonds.

“Whether the cuts happen by the end of the year or next year, there is some uncertainty,” Balcazar said. “But the big picture, the long-term view is clear for us: There will be cuts, the economy will slow down, there’s an increasing chance of recession and therefore this is the right time to own Treasuries in particular in the intermediate part of the curve.”

The Fed raised rates by 25 basis points earlier this month, although officials appear to be divided on whether to pause on further policy tightening. Balcazar thinks persistent inflation pressures are likely to keep US rates pinned at 5.25% — matching the highest level in more than two decades — until 2024.

Stress in the US banking system and mixed economic data have been keeping rates markets volatile this year, leading to back-and-forth bets on whether the Fed can cut. This has made it difficult to own duration positions outright, Balcazar said, which raises the need to protect against market swings.

The US dollar is a “good diversifier” of Treasury risk, he said, and Pictet has been picking it up against the euro and the pound on the view that the European Central Bank and Bank of England will lag in stamping out high inflation. Balcazar also holds some short positions in UK gilts and German bunds on expectations both central banks will have to keep hiking rates.

(Corrects company’s name in second paragraph.)