Pacific Investment Management Co.’s Bill Gross said lower-than-forecast U.S. employment growth will move the Federal Reserve closer to more quantitative easing.
Policy makers will give “strong hints” or provide “positive action” at next week’s Federal Open Market Committee meeting, Gross, who runs the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. The Fed will likely ease further through “open-ended” purchases of Treasuries and mortgages and extend its pledge to keep interest rates low into 2015, he said.
Payrolls rose a less-than-projected 96,000 jobs in August and the unemployment rate declined as more Americans left the labor force, indicating the employment market is stagnating. Fed Chairman Ben S. Bernanke said in an Aug. 31 speech in Jackson Hole, Wyoming, the central bank will provide additional policy stimulus as needed to promote a stronger economic recovery.
The Fed has expanded its balance sheet with two rounds of quantitative easing, as the bond buying has become known. In the first, which ran from 2008 to 2010, the central bank bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, from 2010 to 2011, the Fed purchased $600 billion of Treasuries.
Policy makers have also held their benchmark overnight target rate at zero to 0.25 percent since December 2008 and have said it will remain there until at least late 2014.
“What central banks are trying to do over a longer-term basis, on a weekly basis, on a monthly-basis, is dampen volatility,” Gross said. “They basically want to make investors believe that things aren’t going to change much going forward in terms of yield.”
Pimco’s founder and co-chief investment officer said that investors should try to take advantage of central bank policies and not fight the Fed or European Central Bank, which has endorsed buying one- to three-year sovereign debt of nations such as Spain to keep borrowing costs low.
“Look at it as a surfer would, you want to get on top of that wave and you want to ride it as long as possible and take the force of that wave,” he said. “You sell volatility via mortgages, you sell volatility by capturing the roll down from five to four to three years because things simply don’t change.”
Gross cut the proportion of U.S. government and Treasury debt in his $270 billion Total Return Fund to 33 percent of assets in July from 35 percent the prior month, according to the latest data on Pimco’s website. Mortgages were his largest holdings at 51 percent, down from 52 percent in June.
The Total Return Fund gained 8 percent during the past year, beating 97 percent of its peers, according to data compiled by Bloomberg. The fund gained 0.4 percent in the past month, topping 85 percent of comparable funds.
ECB President Mario Draghi yesterday said policy makers agreed to an unlimited bond-purchase program to regain control of interest rates in the euro area and fight speculation of a currency breakup.
Treasuries are more attractive than German bunds, the refuge for investors in Europe, because the Fed is buying U.S. government debt, Mohamed El-Erian, Pimco’s chief executive officer and co-chief investment officer, said in a separate interview on Bloomberg Television’s “In the Loop” with Betty Liu.
“The Fed will anchor the yield curve,” El-Erian said. “What the ECB is doing is very different. It’s buying peripheral debt and not bunds.”
U.S. government bonds have gained 2.1 percent this year, according to Bank of America Merrill Lynch index data. That compares with 2.6 percent for German bunds.
The benchmark 10-year yield fell six basis points, or 0.06 percentage point, to 1.62 percent in New York. It touched 1.74 percent before the payrolls report, the highest level since Aug. 22. The price of the 1.625 percent note maturing in August 2022 rose 17/32, or $5.31 per $1,000 face, to 100 1/32.
The median estimate of 92 economists surveyed by Bloomberg called for a gain of 130,000 jobs. Unemployment fell to 8.1 percent from 8.3 percent, and hourly earnings were unchanged, Labor Department figures showed today in Washington.