Gross Says Income Will Replace Capital Gains in New Neutral

Pacific Investment Management Co.’s Bill Gross said investors should prepare for a low “new neutral” interest-rate environment and expect low-asset returns that will be less volatile than in prior periods.

“The era of income may be at the margin, replacing the era of capital gains, despite artificially low current yields,” he wrote in his monthly investment commentary on Newport Beach, California-based Pimco’s website. “The alpha heyday of all risk premiums is over.”

Pimco, manager of the world’s biggest bond fund, expects returns to fall as the Federal Reserve unwinds bond buying under the quantitative-easing strategy it has used to support the economy, reducing monthly purchases to $35 billion from $85 billion last year.

“Investors must be aware that QE, in the U.S. at least, will disappear as a policy choice in early November,” he wrote. “Stock market appreciation will slow significantly” and “credit spreads will stop tightening.”

Bond Returns

The Bloomberg U.S. Treasury Bond Index gained 3.1 percent for the first half of 2014. The Bloomberg Global Developed Sovereign Bond Index rallied 5.1 percent in 2014. The Standard & Poor’s 500 Index climbed to a record yesterday. The index has advanced 6.8 percent this year.

Pimco’s Total Return Fund had net redemptions of $4.5 billion in June, according to data from Morningstar Inc. The fund’s assets shrank to $225.2 billion last month, after its 14th straight month of withdrawals, the data show.

The fund returned 3.52 percent this year, trailing 56 percent of peers. In the past month the fund has returned 0.2 percent, beating 84 percent of peers.

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. The “new neutral” interest rate is the inflation-adjusted federal funds rate that isn’t too restrictive or too stimulative for economic growth.

Each country has its own “new neutral” policy rate that is not too hot/ not too cold, but just right,’’ Gross wrote. It is “lower than historic neutrals because the world is now more highly levered.”

Before it's here, it's on the Bloomberg Terminal.