Pimco’s Gross Says Fed Policy Means ‘Free’ Debt for Treasury

Bill Gross
Bill Gross, co-chief investment officer of Pacific Investment Management Co. Photographer: Tim Boyle/Bloomberg

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the Federal Reserve’s latest round of monetary stimulus will enable the Treasury department to issue debt for no cost.

The central bank said yesterday it will buy $45 billion a month of Treasury securities starting in January, expanding its asset-purchase program, and for the first time linked the outlook for its main interest rate to unemployment and inflation targets. The purchases will add to the $40 billion a month it is buying of mortgage debt.

“What really happens, and this is critically important, is that the Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury,” Gross, who runs the $285 billion Total Return Fund, said in an interview on Bloomberg Television with Betty Liu. “It means the Treasury is issuing debt for free. There are complications. Inflation is one of the complications.”

Treasuries fell yesterday after the Fed announced bond-buying plans as traders bet the actions would eventually fuel inflation. Thirty-year Treasury yields reached a five-week high of 2.93 percent today while break-even rates on 30-year inflation-index bonds, a measure of expectations for consumer prices during the life of the securities, climbed to 2.55 percentage points yesterday, the most since Oct. 5.

Inflation, so far, has been held in check and “we are well below 2 percent and the Fed is comforted by that,” Gross said. “But ultimately, if you write checks for free and if it’s costless to finance a fiscal policy that is well into a deficit figure, yes, that’s an inflationary moment to the extent that the private sector gets some animal spirits and takes that bait.”

Pimco’s Total Return Fund gained 11.2 percent during the past year, beating 94 percent of its peers, according to data compiled by Bloomberg. The fund has returned 8.5 percent during five years, outperforming 97 percent of competitors.

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