Pacific Investment Management Co.’s Bill Gross said the end of the 30-year rally in U.S. bonds is unlikely to be reminiscent of the drop in 1994, when the Federal Reserve raised interest rates more than forecast.
Markets are entering “a 12-month period of time ahead in which, combined, Treasury, corporate and high yields don’t move much,” Gross, co-founder and co-chief investment officer of Newport Beach, California-based Pimco, said in a Bloomberg Television interview with Erik Schatzker and Sara Eisen.
The manager of the world’s biggest bond fund said last week that the bull market for bonds probably ended at the end of April as yields reached a low and prices peaked. Gross, who was named fixed-income manager of the decade in January 2010 by Morningstar Inc., said May 10 that fixed-income returns will probably be in the range of 2 percent to 3 percent.
U.S. Treasuries lost 3.35 percent in 1994 as then-Fed Chairman Alan Greenspan surprised the market by doubling benchmark lending rates to 6 percent in 12 months.
“The Fed doesn’t dare move in 200 basis point increments,” Gross said. “Perhaps 25 in 2016. That type of market in our way of thinking is not in store for us.”
The Fed has sought to drive down unemployment by keeping its target rate for overnight loans between banks between zero and 0.25 percent since December 2008 and purchasing securities in monetary policy known as quantitative easing. The Bank of Japan has pledged to double monthly bond purchases and buy longer-term debt to reach a 2 percent annual inflation goal.
Most Fed officials don’t anticipate raising the benchmark rate until 2015, according to their estimates provided with forecasts released after their March 19-20 meeting.
“We see bubbles everywhere,” Gross said. “As long as the Fed, and the Bank of Japan and other central banks keep writing checks and don’t withdraw, then the bubble can be supported.”
The yield on Bank of America Merrill Lynch’s U.S. Broad Market Index, which includes Treasuries, corporate debt and mortgage bonds, fell below 1.58 percent on April 29. Yields on 10-year U.S. Treasury notes fell to 1.61 percent on May 1, the least since December. The yield dropped to a record low of 1.38 percent in July 2012 and declined about 6 basis points, or 0.06 percentage point, to 1.88 percent today.
Treasuries posted an annual loss of 3.35 percent in 1994, the worst performance until the 3.72 percent drop in 2009, according to Bank of America Merrill Lynch’s Treasury Master index. The index is down 0.3 percent this year.
The $292.9 billion Total Return Fund managed by Gross returned 6.3 percent over the past year, beating 90 percent of its peers, according to data compiled by Bloomberg. It has lost 0.4 percent in the past month.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $2.04 trillion in assets as of March 31.