Bill Gross, manager of the world’s biggest bond-fund manager, said an increase in the U.S. unemployment rate in January gives bond yields room to decline after the Treasury market’s worst start to a year since 2009.
“The unemployment rate, instead of drifting to 6.5 percent is drifting up to 7.9 percent,” Pacific Investment Management Co. founder Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene. “That gives space, certainly in the front end of the curve for yields to move down. It gives a little bit of hope on the long end as well.”
Central bank stimulus measures have made bond markets “bubbly,” Gross said. He has been advising investors to avoid longer-maturity government bonds because of the risk that measures such as quantitative easing, or QE, will spur inflation. Labor Department figures showed today that the jobless rate rose from 7.8 percent in December, holding above the 6.5 percent goal the Federal Reserve has set before it will probably begin to wind down asset purchases.
The Fed’s efforts to spur growth have included purchases of over $2 trillion in securities from December 2008 through several rounds of QE, including combined purchases this year of $85 billion in mortgage debt and Treasuries. The European Central Bank flooded its banking system with over 1 trillion euros ($1.37 trillion) in short-term cash beginning over a year ago, while the Bank of England and Bank of Japan have each undertaken their own QE programs.
“As long as that check writing in the trillions continues then that’s a foundation for the bond market, whether or not it’s overvalued or not,” Gross said. “The secret to the analysis is the continuation of the bubble. And we see today’s number at 7.9 percent, and we say ‘hey, it’s still all clear,’ they will still be writing checks and probably continue for a while.”
U.S. government securities lost 0.95 percent in January, the worst start to a year since a 0.08 percent drop in 2009, according to Bank of America Merrill Lynch index data.
Payrolls rose in January by 157,000, while revisions of the prior two months added 127,000 jobs to the employment count, the Labor Department said.
Inflation for the 12 months ending in November was 1.4 percent, according to the Fed’s preferred gauge. The Federal Open Market Committee this week left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and inflation remains no more than 2.5 percent.
Gross, who serves as co-chief investment officer of Newport Beach, California-based Pimco, recommended five-year Treasury securities after minutes of the Fed’s Dec. 11-12 meeting showed several policy makers said it would probably be appropriate to slow or stop purchases well before the end of 2013.
Gross raised the percentage of Treasuries held in his flagship $285 billion Total Return Fund to 26 percent in December, the highest level since July, according to the latest available fund data on Pimco’s website.
The fund gained 10.4 percent in 2012, beating 95 percent of its peers, according to data compiled by Bloomberg. The fund fell 0.28 percent in January.
Investors aren’t fleeing bond funds even after last month’s losses and gains by equities, according to Mohamed El-Erian, Pimco’s chief executive officer and co-chief investment officer with Gross.
“We had a very strong January in terms of inflow, into bond funds,” El-Erian said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu today. “If the ‘Great Rotation’ is happening, it’s not happening at Pimco. What we are seeing the equity funds, the fixed income funds, the commodity funds, is a rotation out of money market funds and out of bank accounts that no longer have complete FDIC insurance. Cash is being pushed into both the equity and fixed-income markets.”
Clients of the largest U.S. banks withdrew funds this month at the fastest weekly pace since the Sept. 11 attacks as a deposit-insurance program ended and customers tapped into their year-end cash hoards. A Federal Deposit Insurance Corp. backstop, the Transaction Account Guarantee program, ended in December, removing temporary unlimited insurance on non-interest bearing transactions accounts over the prior limit of $250,000.
Net withdrawals at the 25 largest U.S. lenders totaled $114.1 billion in the week ended Jan. 9, pushing deposits down to $5.37 trillion, according to Federal Reserve data.