Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund (PTTRX:US), said global central bank debt purchase programs and almost-zero interest rates are bolstering economic growth and asset prices at a cost to savers and investors.
“It has been the objective of the Fed over the past few years to make even more innovative forms of money by supporting stock and bond prices at a cost at an ever ascending scale,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today. “Current policies come with cost, even as they magically float asset prices higher. Negative real interest rates, inflation, currency devaluation, capital controls and outright default” are among the costs, or ”haircuts” from global central banks’ unprecedented monetary stimulus.
The Fed’s efforts to keep long-term interest rates low and holding its target rate at almost zero for more than four years has caused savers to suffer in what Gross has dubbed in the past “financial repression,” given low returns on bank deposits and fixed-income securities. Central-bank efforts to reflate their economies after the financial crisis have devalued the purchasing power of currencies and investment portfolios, Gross said.
Gross advised investors to continue to participate in markets that the Fed and other global central banks are supporting, while gradually reducing risk this year. He added that Treasuries, for now, “are a better alternative than cash.”
“Give your own portfolio a trim as the year goes on,” Gross wrote. “You will give up some higher returns upfront in order to avoid the swift hand” that may result from these ”haircuts.”
Gross boosted the proportion of U.S. government securities in the Total Return Fund to 33 percent in March from 28 percent in February, according to the latest available data on the company’s website. Gross has been advising investors to buy government debt, including inflation-linked securities and nominal Treasuries.
Gross recommended investors reduce so-called duration in their portfolios, risk positions and ”carry” based trades. Duration is a measure of a bond’s price change as interest rates fluctuate. Since as interest rates rise bond prices fall, higher duration leaves an investor at risk for greater losses if yields increase.
Carry based trades in fixed-income securities focus on borrowing money at lower interest rates, typically for shorter maturities, and investing in debt where yields are higher, such as in longer term bonds or higher-risk securities such as corporate.
The world’s biggest manager of bond funds cut mortgage holdings to 33 percent in March, the lowest level since August 2011, from 36 percent in February.
The $289 billion Total Return Fund (PTTRX:US) gained 7.6 percent during the past year, beating 92 percent of its peers, according to data compiled by Bloomberg.
The Federal Open Market Committee has said benchmark rates will stay at almost zero until the unemployment rate is below 6.5 percent as long as inflation stays close to its 2 percent target. After purchasing more than $2 trillion in debt through two rounds of quantitative easing that began in 2008, the central bank is currently buying $85 billion a month in Treasuries and mortgage debt to support the housing market and economic growth.
Wall Street’s biggest bond dealers see little chance the Federal Reserve will slow the pace of debt purchases designed to boost economic growth before the fourth quarter, and more than half forecast the Fed’s $85 billion in bond buying will end in mid-2014, according to a Bloomberg News survey conducted last month.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $2.04 trillion in assets as of March 31.
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