Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the Federal Reserve will probably signal it plans to arrange a third round of debt purchases when policy makers meet in April.
The end of tax breaks enacted by President George W. Bush and $1 trillion of mandatory federal budget cuts are raising concern that declining unemployment will give way to slower economic growth that requires support from the central bank. Policy makers under Chairman Ben S. Bernanke have purchased $2.3 trillion of Treasuries and mortgage debt in two rounds of so-called quantitative easing, known as QE1 and QE2, as they try to sustain the expansion.
The Fed is “likely to hint” at QE3 at its April 25 gathering, Gross wrote on Twitter.
Central bank policy makers upgraded the outlook for the U.S. economy at their March 13 meeting, while they reiterated their pledge to keep interest rates near zero until at least late 2014.
The statement helped send Treasuries to a 1.1 percent loss in March, heading for their steepest monthly decline since December 2010, based on Bank of America Merrill Lynch indexes. Ten-year yields climbed two basis points, or 0.02 percentage point, today to 2.26 percent as of 12:53 p.m. in Tokyo, according to Bloomberg Bond Trader prices.
Yields have risen from a record low of 1.67 percent on Sept. 23, yet they are still less than the average for the past decade of 3.87 percent.
Mortgage bonds are little changed in March, the Bank of America figures show, on speculation that another round of Fed purchases will focus on debt backed by home loans to bolster the housing market.
Pimco’s $252 billion Total Return Fund reduced holdings of Treasuries last month for the first time since February 2011, when it cut its stake in the securities to zero.
Gross lowered the proportion of U.S. government securities in the fund to 37 percent of assets from 38 percent in January, according to a report on the company’s website. He raised mortgages to 52 from 50 percent.
The Total Return Fund earned 5.8 percent for investors over the past year, beating about half of its competitors, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.
U.S. joblessness has fallen to 8.3 percent, the lowest level in three years, according to the Labor Department. The Institute for Supply Management’s factory index shows 31 months of expansion.
Investors are questioning whether the gains can be sustained with the Bush-era income-tax cuts scheduled to expire at the end of this year, while $1 trillion in automatic government spending reductions will start taking effect in January if Congress doesn’t intervene.
“We’ve seen this story in 2010 and 2011, where it looks pretty good in the first half and then we have to change our tune in the second half,” said Robert Tipp, the chief investment strategist in Newark, New Jersey, at Prudential Financial Inc., which oversees $300 billion in bonds.
Housing reports last week showed a key part of the U.S. economy remains under pressure. The Commerce Department said March 23 that new home sales fell to a 313,000 annual pace in February, the slowest since October. Earlier in the week, the National Association of Realtors said existing-home sales eased to a 4.59 million rate last month from January’s 4.63 million.
The central bank is pursuing a maturity-extension program announced in September to replace $400 billion of short-term debt in the Fed’s portfolio with longer-term securities. The program, known as Operation Twist, is scheduled to end in June.
Two Fed district bank presidents said the strengthening U.S. economy is reducing the need for additional monetary stimulus.
“As the U.S. economy continues to rebound and repair,” additional steps “may create an overcommitment to ultra-easy monetary policy,” St. Louis Fed President James Bullard said in a speech March 23 in Hong Kong. Atlanta Fed President Dennis Lockhart said the same day in Washington that “we should hold the balance sheet where it is for the time being and watch how the economy evolves.”
Lockhart votes on monetary policy this year, while Bullard votes in 2013.
Even with oil above $100 a barrel since the middle of February, the Fed’s preferred measure of gauging the outlook for inflation show consumer prices is less than its 10-year average.
The five-year, five-year forward breakeven rate, which projects the pace of price increases starting in 2017, was 2.73 percent last week. The average for the past decade is 2.76 percent.
Editors: Garfield Reynolds, Benjamin Purvis