Gross Says Focus on Shorter Maturities as Inflation Trumps JobsLiz Capo McCormick
Pacific Investment Management Co.’s Bill Gross said investors should focus on shorter-maturity debt as the slow pace of U.S. inflation signals the Federal Reserve’s benchmark rate will remain at almost zero until at least 2016.
“Bond prices -- especially those at the front end of the yield curves, say one to five years, are critically dependent on the future level of fed funds, not the glide path of the almost preordered Fed taper,” of its bond purchases, Gross, manager of the world’s biggest bond fund, wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today.
The market is focused on the unemployment rate, yet the annualized personal consumption expenditure inflation rate is “the critical monthly statistic for analyzing the Fed policy rate in 2014,” Gross wrote referring to the central bank’s target rate for overnight loans between banks.
Fed officials last month saw declining economic gains from the central bank’s asset purchases as they decided to begin this month a cut of $10 billion to its $85 billion in Treasury and mortgage debt purchases, the minutes of the Federal Open Market Committee’s Dec. 17-18 meeting showed yesterday. The FOMC lowered its target interest rate to near zero in December 2008 and said it will stay there as long as the unemployment rate remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.
“Investors should own bonds with less duration and shorter maturities,” when rates may be moving higher, Gross wrote, who has advocated over the last few months that investors focus on Treasury debt with maturities around five years.
The five-year Treasury note yield was little changed today at 1.75 percent, and is up from as low a fourth-quarter low of 1.25 percent reached on Oct. 30.
The performance of Pimco’s $237 billion Total Return Fund puts it behind 72 percent of similarly managed funds over the last year, with a loss of 1.85 percent, according to data compiled by Bloomberg.
The Fed’s meeting minutes said “many participants expressed concern about the deceleration in consumer prices over the past year.” The personal consumption expenditures price index, known as the PCE, rose 0.9 percent for the 12 months ending November, more than a percentage point below the Fed’s 2 percent target. Some participants said inflation was unlikely to slow further.
Recent progress on jobs, manufacturing and housing has affirmed the FOMC’s view that the economy is improving enough to take the first step toward exiting stimulus that has swelled the Fed balance sheet to more than $4 trillion. The central bank is expected to wind down its quantitative easing program by the end of this year, according to a survey of economists by Bloomberg News.
Current Fed Chairman Ben S. Bernanke and future chairman Janet Yellen “and their merry band of Fed governors and regional presidents have told us” that that the inflation rate is critical to Fed policy, Gross wrote. “No policy rate hike until both unemployment and inflation thresholds have been breached and even then ‘they’re not thresholds’,” Gross wrote.
“Miles to go before” anyone “has to begin to worry about a policy rate hike,” Gross wrote. “2016 at the earliest.”