Gross Sees Subdued Asset Price Growth as Credit Expansion Slows

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said slowing credit expansion among the world’s economies means asset-price growth will be subdued and risks are present.

“Asset prices are dependent on credit expansion, or in some cases, credit contraction, and as credit goes, so go the markets,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today. “With credit growth slowing, due in part to lower government deficits, and QE now tapering, which will slow velocity, the U.S. and other similarly credit based economies may find that future growth is not as robust as the IMF and other model-driven forecasters might assume.”

The International Monetary Fund raised its global growth projection to 3.7 percent from an October estimate of 3.6 percent on accelerations in the U.S. and U.K. The average projection for 2014 U.S. GDP growth is 2.8 percent, up from 2.6 percent at the start of the year.

Stocks around the world have declined after Argentina unexpectedly devalued the peso, Turkey’s decision to double interest rates backfired and China’s manufacturing growth slowed. A report this week showed U.S. factory output expanded in January at the weakest pace in eight months and China’s official Purchasing Managers Index fell to a six-month low.

Fed Policy

At the same time, the Federal Reserve is lowering stimulus, known as quantitative easing, which helped propel global equity gains of 123 percent the past five years. At its peak in January, the S&P 500 had rallied 173 percent from its 2009 low, a bull market that was almost a year older than the average since World War II.

With the U.S. deficit now down to “$600 billion or so, the Treasury is fading as a source of credit growth,” Gross wrote in the note. “Credit over the past 12 months has grown at a snail’s 3.5 percent pace, barely enough to sustain nominal GDP growth of the same amount.”

Payrolls in December increased at the slowest pace since January 2011, indicating a pause in the recent strength of the U.S. labor market that may partly reflect the effects of bad weather. The 74,000 gain in payrolls, less than the most pessimistic projection in a Bloomberg survey, followed a revised 241,000 advance the prior month, Labor Department figures show.

The U.S. added 184,000 jobs in January, according to economists surveyed by Bloomberg forecast before the Labor Department’s nonfarm payrolls report on Feb. 7.

Treasury Market

Gross said yesterday in a Bloomberg Television interview that he is focused on buying “the safest positions,” including Treasuries with maturities between four and five years.

Treasury 10-year yields fell two basis points, or 0.02 percentage point, to 2.61 percent as of 8:38 a.m. in New York, Bloomberg Bond Trader data show. The yield climbed five basis points yesterday, the biggest increase since Dec. 31.

The performance of the $237 billion Total Return Fund during the past three years puts it ahead of 67 percent of similarly managed funds, gaining 4.7 percent during the period, according to data compiled by Bloomberg. The fund is up 1.6 percent this year, beating 58 percent of its peers.

Pimco, a unit of the Munich-based insurer Allianz SE, managed more than $1.9 trillion in assets.