Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co., said a rise in 10-year Treasury note yields would signify success by the Federal Reserve in reviving inflation and economic growth.
"If it does work, here's why the 10-year goes down in yield then back in yield, it's because the out years, five, six, seven, eight, nine, and 10 are vulnerable to inflation and higher policy rates in those particular years," Gross said in an interview today on "Bloomberg Surveillance" with Tom Keene.
The Fed, led by Chairman Ben S. Bernanke, will announce another round of asset purchases when policy makers meet next week after deploying $1.7 trillion to pull the economy out of the financial crisis, according to a survey of the 18 primary dealers that trade debt with the central bank. Fed officials, who already cut interest rates almost to zero, are discussing more purchases of Treasurys to flood markets with cheap money as well as strategies for raising inflation expectations to prevent stagnating prices from undermining the recovery.
Gross, a founder and co-chief investment officer of Newport Beach, California-based Pimco, said yesterday in his monthly commentary that a renewal of asset purchases by the central bank will likely indicate the end of the 30-year bull market in bonds. Treasury yields are near historically low levels in part because Fed purchases make it mathematically impossible for bonds to do much better, he said today.
"It's not an end from the standpoint of over-the-cliff or over-the-edge," Gross said. "It's not a Columbus thing where he thought he was sailing off the ocean and may fall off the edge. It's an end from the standpoint of recognizing that certain maturities can't go much lower in yield."
Total Return Fund
Gross has reduced holdings of government-related debt in the $252 billion Total Return Fund for the third straight month in September, after the securities accounted for 63 percent of assets in June, the highest since it held an equal amount in October 2009.
Pimco hasn't cut the flagship fund's duration, which is in line with the 4.25 years to 4.5 years of Barclays Plc's benchmark index, Gross said. Duration, a measure of a bond's price sensitivity to interest rate changes, generally increases with maturity. The firm is focused on "safe-space" that's not vulnerable to inflationary expectations, Gross said.
"A two-year Treasury and a three-year Treasury only yield 37 to 60 basis points, but that's safe yield because the Fed isn't going anywhere," Gross said. "We've been willing to accept the lower yield in anticipation of a hand-off to federal officials maybe six months down the road."
'Tighten Monetary Policy'
The yield on the 10-year Treasury note dropped from a 2010 high of 4.01 percent in April to a low of 2.33 percent on Oct. 8, according to Bloomberg data, as investors purchased Treasurys in anticipation of further asset purchases by the central bank. The record of 2.04 percent was set in December 2008.
"They have to buy assets and at some point, if inflation starts to get to their target, whether it's a 2 percent target or a price target, then they begin to raise the cost of those reserves, and therefore tighten monetary policy," Gross said.
Pimco added to its mortgage holdings in September to 28 percent of assets, from 21 percent in the prior month. Pimco also expanded its emerging-market debt to 12 percent last month, the highest since at least September 2006. Non-U.S. developed debt was unchanged at 6 percent.
The Total Return Fund, also the world's biggest mutual fund, handed investors a gain of about 11.09 percent in the past year, beating about 76 percent of its peers, according to data compiled by Bloomberg. Pimco, a unit of Munich-based insurer Allianz SE, managed $1.236 trillion of assets as of September.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net.
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net.
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