Pimco’s El-Erian Says Chance of U.S. Deflation Is 25%

Pacific Investment Management CEO Mohamed A. El-Erian
The U.S. faces a 25 percent chance of deflation and a double-dip recession, according to Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co. Photographer: Jonathan Alcorn/Bloomberg

The U.S. faces a 25 percent chance of deflation and a double-dip recession, according to Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., which runs the world’s biggest bond fund.

“I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario,” said El-Erian, 51. U.S. unemployment will probably stay unusually high, he told reporters today in Tokyo.

Companies are accumulating cash and individuals are saving, making it tougher to counter deflation, El-Erian said. That reduction in private-sector spending makes government policies to stimulate the economy less effective, he said.

A mix of the lowest U.S. inflation rate in four decades and concern that the global recovery will falter is boosting Treasuries, sending two-year yields to a record low this week. Bill Gross, who oversees the record $239 billion Pimco Total Return Fund, raised holdings of U.S. government-related debt in June to the highest level in eight months, according to the company’s website.

A U.S. report tomorrow will show the nation lost jobs for a second month in July, economists said. The unemployment rate climbed to 9.6 percent from 9.5 percent, the survey showed.

The U.S. two-year note yielded 0.57 percent at 7:58 a.m. in London, after reaching a record low of 0.5143 percent on Aug. 3. The 0.625 percent note due July 2012 traded at a price of 100 3/32, according to BGCantor Market Data.

Consumer Prices

Consumer prices excluding energy and food held at a 44-year low of 0.9 percent in June, according to the Labor Department.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has narrowed to 1.82 percentage points from this year’s high of 2.49 percentage points in January. Deflation is a general decline in prices.

Federal Reserve Chairman Ben S. Bernanke said Aug. 2 that rising wages will probably spur household spending in the next few quarters

While the U.S. has “a considerable way to go” for a full recovery, “rising demand from households and businesses should help sustain growth,” Bernanke said in a speech in Charleston, South Carolina.

Savings Rate

The savings rate for American households increased to 6.4 percent in June, the highest level in a year, according to the Commerce Department.

U.S. companies held cash reserves and liquid assets of $1.64 trillion as of March 31, 26 percent higher than the same point a year ago, according to the Federal Reserve.

Economic growth slowed to 2.4 percent in the second quarter from 3.7 percent in the first. It will be 2.7 percent in the July-to-September period and 2.8 percent in the last three months of the year, a Bloomberg survey of economists shows.

U.S. gross domestic product contracted 2.6 percent last year.

The $239 billion Total Return Fund managed by Bill Gross in Newport Beach, California, returned 12.8 percent in the past year, beating 68 percent of its peers, according to data compiled by Bloomberg.

Pimco, which managed more than $1.1 trillion of assets as of June 30, according to its website, is a unit of Munich-based insurer Allianz SE.

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