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Gross Says Savers at a Disadvantage for Years: Tom Keene

Pimco Co-Chief Investment Officer Bill Gross
Bill Gross, co-chief investment officer of Pacific Investment Management Co., said in his monthly commentary that Federal Reserve policy poses an “immediate threat” to bondholders as inflation rates rise above bond yields. Photographer: Scott Eells/Bloomberg

May 26 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors may be at a disadvantage for as long as 15 years as the U.S. keeps borrowing rates low to reduce its debt burden.

“Savers are being disadvantaged” when compared with debtors, Gross said during an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “What policy makers are trying to do is rebalance this imbalance, in terms of too much debt and too attractive rates on savings. It’s basically called financial repression. We call it pocket picking.”

Bond holders are being hurt by low policy rates -- a Federal Reserve funds rate at zero to 0.25 percent in the U.S. -- and the increasingly negative real yields they cause as inflation accelerates, which erodes the value of fixed-payments for savers, according to Gross. This is taking place as the government reaps the gains of low rates, which reduce the cost of servicing its debt.

The difference between the yields on Treasury 10-year notes and the rate of inflation, known as the real yield, turned negative this month for the first time since the end of 2008, when Fed policy makers cut interest rates to a record low and embarked on a series of policy measures that peaked with its program of bond buying that has been dubbed quantitative easing, or QE.

Budget Deficit

This year’s federal budget deficit is projected to reach $1.5 trillion, or 9.8 percent of gross domestic product, according to the Congressional Budget Office.

Pimco’s $240.7 billion Total Return Fund had minus 4 percent of its assets in government-related debt last month. It can have a so-called negative position by using derivatives, futures or by shorting. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.

Gross, 67, said investors should seek alternatives to U.S. bonds, including developing or emerging-market debt at higher yields denominated in non-dollar currencies. Canadian and German government debt, as well as U.S. corporate securities, are attractive alternatives, Gross reiterated today.

Earlier this month, Gross said that the firm has a short position in short-term LIBOR bank-related swaps, one component of the government related category that also comprises agency bonds, interest-rate swaps, Treasury Inflation Protected Securities, or TIPS, Treasury futures and options and corporate securities guaranteed by the Federal Deposit Insurance Corp.

Total Return Fund

Cash and equivalents, the largest component of the fund, rose to 37 percent of holdings in April from 31 percent. Mortgage bonds declined to 24 percent from 28 percent, the Newport Beach, California-based company said on its website earlier this month.

The Total Return Fund returned 7.83 percent in the past year, beating 82 percent of its peers, according to data compiled by Bloomberg. The fund gained 0.65 percent in the past month, better than about 19 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE.

To contact the reporter on this story: Liz Capo McCormick in New York at

To contact the editor responsible for this story: Dave Liedtka at

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