Bill Gross got it right when he recommended short-maturity Treasuries this week.
“Not braggin’ but what did we tell you,” Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote on Twitter yesterday.
The difference between five- and 30-year yields widened to as much as 2.38 percentage points today, the most in almost six months. Gross wrote on Twitter on Sept. 15 that investors would demand more yield to own long bonds versus five-year notes after Lawrence Summers quit the race to head the Federal Reserve. The former Treasury secretary’s decision ended speculation that he would undo the central bank’s policies aimed at holding down borrowing costs.
The Fed unexpectedly refrained from reducing its $85 billion pace of monthly bond buying yesterday, saying it needs more evidence of lasting improvement in the economy. Futures contracts indicate investors are betting policy makers will wait longer before raising their target for overnight lending between banks, benefiting short-term Treasuries, those that are most sensitive what the central bank does with its benchmark.
Vice Chairman Janet Yellen, a supporter of Bernanke’s policies, is the top candidate to succeed him, according to people familiar with the process.
Yesterday “what we got was an increasingly dovish handoff from Chairman Bernanke to Janet Yellen,” Gross said today in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Michael McKee. “Bernanke has metaphorically left the building. We are living in a Yellen world. And Yellen is a dove with a capital D.”
Gross’ $251.1 billion Total Return Fund has fallen 2.5 percent this year, underperforming about two-thirds of its peers, according to data compiled by Bloomberg. During the past five years, it has gained an average of 7.5 percent annually, ranking in the 90th percentile.
Pimco, based in Newport Beach, California-based company is a unit of Munich-based insurer Allianz SE.
The Fed left unchanged its outlook that its target interest rate will remain near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent, according to a statement after its two-day meeting concluded yesterday.
Unemployment was 7.3 percent in August, and the central bank’s preferred measure of cost increases in the economy was at
1.4 percent in July. The Fed has kept the target for its benchmark in a range of zero to 0.25 percent since 2008.
Thirty-day federal funds futures contracts for delivery in May 2015 yielded 0.49 percent today. The futures contracts, which are traded at CME Group Inc., give a 34.7 percent probability the Fed will lift rates by at least a quarter-percentage point at its December 2014 policy meeting. That’s down from a 63.3 percent probability on Sept. 13.
“We’ve returned to a more normal period of time where the Fed has told us they are not going to raise interest rates and bond prices won’t tumble as they did over the past few months,” Gross said in the radio interview. “Bond holders have a chance to collect their coupon and then some.”
A Bloomberg U.S. Treasury Bond Index measuring securities due in one to five years returned 0.5 percent this week and 0.4 percent for September as of yesterday.
The Bloomberg index tracking U.S. government securities maturing in 10 years and longer gained 1.4 percent this week, leaving it with a monthly loss of 0.4 percent.
U.S. five-year note yields rose four basis points at 1.46 percent at 10:40 a.m. in New York, based on Bloomberg Bond Trader prices. Thirty-year yields increased three basis points to 3.78 percent.
While shorter-term notes tend to follow what the Fed does with its benchmark rate, longer-maturity bonds are more influenced by the outlook for inflation and the central bank’s debt purchases.
“They will continue easier monetary policies,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank by market value, referring to Fed policy makers. “The risk of inflation pushes up longer-term yields.”