'Titanic battle' over deflation about to sink long bonds: Gross

Pimco PM sees return of price hikes; backs equities, TIPS, short-term debt

Sep 21, 2012 @ 7:53 am

By Dan Jamieson

Bill Gross
+ Zoom
Gross: Tilting ((Photo: Bloomberg News))

Bll Gross is betting that central banks, including the U.S. Federal Reserve, will be successful in their efforts to ignite some inflation as they print money with the hope of generating economic growth.

“What I sense is a titanic battle of the ages, a battle between deflation and reflation,” the manager of the world’s largest bond fund said Thursday.

Mr. Gross, co-founder and co-chief investment officer of Pacific Investment Management Co. LLC, gives the reflation effort a 70% to 75% chance of succeeding, versus a 20% to 25% chance of deflation taking hold.

“So you should naturally tilt your portfolios to reflation,” he told an audience of about 400 advisers and ETF providers at the IndexUniverse Inside Fixed Income Conference in Newport Beach, Calif.

Even if central banks were to begin moving interest rates up, it wouldn’t trigger 1970s-style inflation of 12% or 13%, with gold tripling in value, Mr. Gross said.

“We’re not looking to that, but we see inflation moving to perhaps 3.5%,” he said.

That scenario “tilts you toward the equity side, I suppose,” Mr. Gross said. “Tilt toward [Treasury inflation-protected bonds], shorter-duration [bonds], tilt to developing countries, tilt to real assets. I’m not a gold bug … but if the Fed prints another trillion or two, they will have debased the currency relative to gold [or to] assets that can’t be produced at that rate.”

Mr. Gross addressed the question that he indicated was on everyone’s mind: How could the Pimco Total Return Exchange-Traded Fund, an ETF best known by its trading symbol BOND, do so much better than its broad-based bond benchmark?

“I ask myself that everyday,” he said, noting that the ETF has produced a 700 basis point return advantage over the Barclays U.S. Aggregate Bond Index over the past seven months.

“It’s an appreciation rate that can’t be continued,” he said. “The target is 100 to 200 basis points over [the index].”

So how has it happened? “Because we work like dogs,” Mr. Gross said. “I get in at 5:30 a.m. and follow BOND obsessively, every five minutes. It’s sort of ridiculous, but I really care.”

In addition, Mr. Gross said it was easier to manage “a fund that’s all cash flow” coming in. “It gives you an open range of choices.”

With $2.7 billion in assets now, though, “it’s a little harder. But it is still an achievable objective to beat the [bond] index funds,” Mr. Gross said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

The business case for hiring NextGen talent

Firms hiring nextgen talent have reaped the benefits from greater productivity to revenue growth. Clearly, there's a business case to be made for hiring millennials. Kate Healy of TD Ameritrade breaks it down.

Latest news & opinion

Sean Spicer resigns as press secretary after Anthony Scaramucci is appointed communications director

Scaramucci is known as an ardent foe of the DOL fiduciary rule, having said during the campaign that Trump would repeal it .

Redoing the math on a 4% retirement withdrawal rate

Given the current interest-rate environment and other factors, advisers disagree about whether the number is too conservative or not conservative enough.

House panel passes bill to replace DOL fiduciary rule with one requiring disclosure of conflicts

Measure likely to continue in partisan advance in House, but could stall in Senate.

Morgan Stanley says recruiting and attrition have slowed down

If wirehouses can successfully reduce their reliance on signing bonuses to recruit brokers, they could increase profits.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print