Bloomberg News

Gross Says Witnessing Death of Abundance, Birth of Austerity

February 02, 2012

(Adds comments from Gross beginning in third paragraph.)

Feb. 1 (Bloomberg) -- Bill Gross said the zero-bound interest rate policies embraced by central banks including the Federal Reserve may end up killing as opposed to creating credit and developed economies may suffer accordingly.

While recent actions by policy makers provide assurances that short and intermediate U.S. bond yields may not change for years, any potential for price appreciation is limited, Gross, who runs the world’s biggest bond fund, wrote today in a monthly investment outlook released on Newport Beach, California-based Pacific Investment Management Co.’s website.

“Monetary and fiscal excesses carry with them explicit costs,” Gross wrote. “My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic.”

The Fed purchased $2.3 trillion of debt in two rounds of quantitative easing known as QE1 and QE2 as part of its efforts to support the world’s biggest economy. Policy makers last month said they plan to keep their benchmark interest rate near zero until at least the end of 2014. Fed Chairman Ben S. Bernanke said following the central bank’s Jan. 25 meeting that he’s considering another program of debt purchases if it appears the recovery isn’t progressing.

‘Death of Abundance’

Zero-bound interest rates don’t always force investors to take more risk by purchasing stocks or real estate, Gross said. When investors are more concerned about the return of, rather than returns on, their money, the liquidity being provided by central bankers can instead be “trapped” in a mattress, bank account or Treasury bills, he wrote.

“We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time,” Gross said.

Gross boosted the proportion of U.S. government and Treasury debt in the $244 billion Total Return Fund to 30 percent of assets in December, the highest since November 2010, according to a report placed on the company’s website. His fund has returned 6.57 percent in the past year, beating 53 percent of its peers, according to data compiled by Bloomberg. It gained 2.58 percent over the past month, beating 99 percent of peers.

Benchmark 10-year yields rose two basis points, or 0.02 percentage point, to 1.82 percent at 7:58 a.m. in New York, according to Bloomberg Bond Trader prices. The rate slid to 1.79 percent yesterday, approaching the record low of 1.67 percent set Sept. 23.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.35 trillion of assets as of September.

--Editors: Dave Liedtka, Dennis Fitzgerald

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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