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Gross Says ’New Neutral’ Rate Lower for Years to Come

Bill Gross
“Commonsensically, it seems to me that the more finance-based and highly levered an economy is, the lower and lower real yield levels must be in order to prevent a Lehman-like earthquake,” PIMCO's Bill Gross said. Photographer: Andrew Harrer/Bloomberg

Pacific Investment Management Co.’s Bill Gross said the “new neutral” rate -- the inflation-adjusted federal funds rate that isn’t too restrictive or too stimulative for economic growth -- will be “frigidly low” for an extended period of time.

The new neutral “suggests things are just going to be this way for at least the next three to five years, and likely much more,” he wrote in his monthly investment commentary on Newport Beach, California-based Pimco’s website.

The rate, which has dropped to 2 percent, from 4 percent in early 1970, is headed lower and will be close to zero rather than the 2 percent to 3 percent seen in prior decades, he wrote.

“Commonsensically, it seems to me that the more finance-based and highly levered an economy is, the lower and lower real yield levels must be in order to prevent a Lehman-like earthquake,” Gross said.

The European Central Bank cut its benchmark interest rate to a record low 0.15 percent and cut its deposit rate to minus 0.1 percent, becoming the first major central bank to take one of its main rates negative. The Fed has kept its benchmark rate at a record zero to 0.25 percent since December 2008.

Old Normal

Pimco popularized the term “new normal” to describe an era of below-average economic growth following the financial crisis. Gross said financial markets are gradually entering a phase where central-bank interest rates will remain stuck below their pre-crisis equilibrium.

“With ’The New Neutral’ real and nominal interest rates, savers and investors are effectively being ’taxed’ in order to benefit debtors,” Gross wrote. “There are ways to fight back, most of which involve emphasizing more attractively priced forms of ’carry’ than duration, especially at 10-year Treasury yields of 2.5 percent and below.”

If the rates stay low, it supports current prices of financial assets, Gross said, adding that they would appear to be “less bubbly.”

Gross suggested investors explore alternative forms of earnings, including “credit, volatility, yield curve and currency overweights that themselves appear to be artificially priced, but less so.”

Pimco’s Total Return Fund, the world’s biggest bond fund, returned 2.87 percent this year, trailing 64 percent of peers. In the past month the fund has returned 0.69 percent, beating 92 percent of peers.

Investors pulled money from the Total Return Fund for a 13th straight month, Chicago-based Morningstar Inc. said June 2 in an e-mailed statement. The fund suffered an estimated $4.3 billion in redemptions in May as its assets fell to $229 billion as of the end of the month from a peak of $293 billion last year.

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