Bill Gross, manager of the world’s biggest bond fund, said investors are increasingly at risk as global financial markets run out of energy and time.
“The countdown begins when investable assets pose too much risk for too little return,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pacific Investment Management Co.’s website today.
The record monetary stimulus of the Federal Reserve, triggering near-zero interest rates, has crippled savers and prior business models that were based on a positive real return, he said. Real growth of the economy has suffered in the process as net interest margins at banks fall, insurance companies struggle to make returns and pension funds are increasingly underfunded.
Investors should position for eventual inflation as the “end stage of a supernova credit explosion” is likely to produce more inflation than growth by holding Treasury Inflation Protected Securities, Gross wrote. “Get used to slower real growth; QE and zero-based interest rates have negative consequences. Move money to currencies and asset markets in countries with less debt and less hyperbolic credit systems” such as Australia, Brazil, Mexico and Canada.
Following the end of it two-day rate-setting meeting yesterday, the Federal Open Market Committee kept its debt purchasing, in its latest quantitative easing program, at the rate of $85 billion a month. The Fed is purchasing $40 billion a month of mortgage bonds and $45 billion a month of Treasuries. The Fed has held its target rate in a range of zero to 0.25 percent since December 2008.
Inflation for the 12 months ending in November was 1.4 percent, according to the Fed’s preferred gauge. That’s below the central bank’s longer-run target of 2 percent. Investors expect inflation of 2.3 percent over the next five years, as measured by the spread between yields of five-year TIPS and nominal notes.
Gross recommended five-year Treasury securities after minutes of the Fed’s Dec. 11-12 meeting showed several members of the FOMC said it would probably be appropriate to slow or stop purchases well before the end of 2013. The Fed is in its third round of bond purchases under the quantitative-easing stimulus strategy.
Gross raised the percentage of Treasuries held in his flagship $285 billion Total Return Fund (PTTRX:US) to 26 percent in December, the highest level since July, according to the latest available fund data on Pimco’s website.
“Transition from financial to real assets if possible at the margin,” Gross wrote in the note today. “Buy something you can sink your teeth into - gold, other commodities, anything that can’t be reproduced as fast as credit.”
The Total Return Fund kept its holdings of non-U.S. developed nations’ debt at 12 percent last month. Gross cut the fund’s emerging-market debt to 7 percent, from 8 percent.
The fund gained 10.4 percent in 2012, beating 95 percent of its peers, according to data compiled by Bloomberg. The fund is down 0.28 percent in January.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.92 trillion in assets as of Sept. 30.
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