Pacific Investment Management Co.’s Bill Gross said he favors longer-maturity debt with the Federal Reserve likely to seek to narrow the difference between short- and long-term borrowing rates as employment growth stagnates.
“We’ve advocated hard duration; that basically means something beyond five years,” Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The front end of the curve, in the U.S. at least, is inert. You have to move out into longer duration, harder duration.”
A government report today showing job growth was flat in August bolstered the view that Fed Chairman Ben S. Bernanke will be inclined to take additional steps beyond the two previous rounds of debt buying, known as quantitative easing, or QE. The central bank will likely extend the maturities of its portfolio by buying five- to 10-year Treasuries while shedding shorter- maturity debt, Gross said, in what has been referred to as “Operation Twist” after a similar program in the 1960s.
“I don’t know what form it will take and whether you call it a QE, there’s certainly opposition from the hawks in terms of the Fed,” Gross said. “We would stick in the 5- to 10-year area and I think that will be the focus for the Fed in terms of policy change come September.”
The yield on 10-year Treasuries fell 10 basis points, or 0.10 percentage point, to 2.03 percent at 10:07 a.m. in New York, according to Bloomberg Bond Trader prices. Yields on two- year notes rose 2 basis points to 0.20 percent.
More stimulus from the Fed may not be beneficial because it risks a political backlash that could threaten to undermine the central bank and weaken the economy by driving up commodity prices, Mohamed A. El-Erian, Pimco’s chief executive officer and co-chief investment officer with Gross, said today on Bloomberg Television’s “In The Loop” with Betty Liu.
“The balance between the benefits and cost and risks has changed in an adverse manner,” El-Erian said. “At the end of the day we will not be solving anything. We’ll just be undermining the economy and a critical institution for the well being for America.”
Payrolls were unchanged last month, the weakest reading since September 2010, after an 85,000 gain in July that was less than initially estimated, Labor Department data showed today in Washington. The median forecast in a Bloomberg News survey called for a rise of 68,000. Hourly earnings and hours worked both declined. The August data included a 48,000 drop in information industry jobs, mostly reflecting striking Verizon Communications Inc. workers.
Governments should be focusing on creating growth rather than reducing debt, Gross said. “To do it right now is almost suicidal,” he said.
The economy expanded at a 1 percent pace in the second quarter following a 0.4 percent gain in the first three months of the year, the Commerce Department reported last month. Consumer spending grew 0.4 percent, the smallest increase since the last three months of 2009.
The $245 billion Total Return Fund managed by Gross has lost 0.4 percent in the past month, underperforming almost 90 percent of its peers, according to Bloomberg data. The fund’s 4.07 percent return this year is worse than about two-thirds of competitors, the data show. Gross has outperformed 98 percent of his rival fund over the past five years.
Treasuries have returned 7.5 percent since February, when Gross eliminated the Total Return Fund’s holding of U.S. government securities. He boosted Treasuries to 10 percent of assets in July from 8 percent in June, the Newport Beach, California-based firm said on its website last month.
Gross said in a Financial Times interview that was published this week that it was a “mistake to bet so heavily against the price of U.S. government debt.”
U.S. government bonds have returned 2.8 percent in August, the most since December 2008, as investors bet on slower growth and sought a refuge from global financial market turmoil, according to a Bank of America Merrill Lynch index.
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