Gross Says Credit Expansion to Create Inflation, Slow Growth

Pimco's Bill Gross
Pimco's Bill Gross said, “Not suddenly, but over time, gradually higher rates of inflation should be the result of QE policies and zero bound yields that will likely for years to come.” Photographer: Andrew Harrer/Bloomberg

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said structural distortions brought by central bank credit expansion will limit growth and accelerate the risk of inflation.

Pimco favors bonds in the five-year maturity range, as well as dividend-paying stocks that yield 3 to 4 percent and recommended that real assets and commodities be part of an investor portfolio, Gross said in his monthly investment outlook posted on the Newport Beach, California-based company’s website today.

“Not suddenly, but over time, gradually higher rates of inflation should be the result of QE policies and zero-bound yields that will likely continue for years to come,” Gross said, referring to the Federal Reserve’s balance sheet through debt purchases, or quantitative easing, known as QE.

The Fed purchased $2.3 trillion of debt in two rounds of quantitative easing that have become known as QE1 and QE2 as part of its efforts to support the world’s biggest economy. Policy makers in January said they plan to keep their benchmark interest rate near zero until at least the end of 2014.

“The current acceleration of credit via central bank policies will likely produce a positive rate of real economic growth this year for most developed countries, but the structural distortions brought about by zero-bound interest rates will limit the growth” Gross wrote. And “induce serious risks in future years.”

Global Policies

Central bank policy makers around the world are trying to nurture nascent recoveries or lift their economies from recessions, such as in the U.K. The Bank of England voted last month to complete their current round of 325 billion pounds ($528 billion) of debt purchases. The European Central Bank held its benchmark interest rate at 1 percent last month, and President Mario Draghi infused the regions banking system with cash in December and February through two longer-term refinancing operations.

Fixed-income assets -- from Australian government debt to U.S. Treasuries to global junk bonds -- gained 0.7 percent last month including reinvested interest, according to Bank of America Merrill Lynch index data. The MSCI All-Country World Index of stocks lost 1.1 percent including dividends while the Standard & Poor’s GSCI Total Return Index of metals, fuels and agricultural products fell 0.5 percent. The U.S. Dollar Index dropped 0.3 percent.

Inflation Outlook

Investors sought the perceived safety of fixed-income investments after U.S. job growth in March was less than economists’ forecasts and concern European leaders will fail to manage their debt loads. Joblessness in the euro area probably rose to 10.9 percent last month, the highest since 1997, according to economists surveyed by Bloomberg.

“Inflation should creep higher,” Gross wrote in the note today. “Do not be mellowed by the affirmation of a 2 percent target rate of inflation here in the U.S. or as targeted in six of the G-7 nations.”

Pimco’s $259 billion Total Return Fund beat 99 percent of its competitors this year with a 4.38 percent return. Gross in February reduced holdings of Treasuries for the first time in a year, when it cut its stake in the securities to zero.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.35 trillion of assets as of September.

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