Pacific Investment Management Co. LLC's Bill Gross, manager of the world's biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the Federal Reserve's intent to keep benchmark lending rates at almost zero.
“The safest pitch to swing at may not be stocks but the asset that will soon be the nearly sole focus of central banks,” Mr. Gross wrote in his monthly investment outlook posted on Pimco's website last Tuesday. “Instead of [quantitative easing], central bankers are shifting to forward guidance, which — if reliable — allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns.”
Mr. Gross's Pimco Total Return Fund has dropped more than $41 billion, or 14% of its assets, over the past four months as a result of losses and investor withdrawals. The fund suffered $7.7 billion in net redemptions in August, according to Morningstar Inc. — the fourth straight month of withdrawals and the second-highest amount this year.
In December, Fed Chairman Ben S. Bernanke moved the central bank further into uncharted policy territory in combating joblessness by tying the bank's interest rate outlook to unemployment and inflation, known as their forward-guidance policy. Policymakers at the Fed, which is buying $85 billion in mortgage and Treasuries in its most recent QE program, have focused more at recent policy meetings on forward guidance, in part to assure financial markets that policies will remain accommodating for many years, even as it scales back bond buying.
Economists think the Fed is likely to reduce its bond purchases as soon as this month's policy meeting, according to a Bloomberg survey last month. The central bank's target rate has been set in a range of zero to 0.25% since December 2008.
"MOST RELIABLE BET'
“If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark,” Ms. Gross wrote in his report. “While low, they can at least form the basis for curve roll-down and volatility strategies that have higher return/risk ratios than alternative carry options such as duration, credit or currency.”
Central bankers last year for the first time linked their interest rate outlook to economic thresholds, saying rates will stay low “at least as long” as unemployment remains above 6.5% and if the Fed projects inflation of no more than 2.5% one or two years in the future. Fed officials don't see joblessness falling near that goal until 2015.
Speculation the Federal Open Market Committee will dial down purchases at its Sept. 17-18 meeting has roiled financial markets, pushing up U.S. bond yields and contributing to the worst rout in the currencies of developing nations in five years.
Mr. Gross also recommended investors buy Treasury inflation-protected securities as a hedge against the risk that expansionary government and monetary policy could eventually spark inflation.
The performance of the $251 billion Total Return Fund puts it behind 51% of similarly managed funds over the past 12-month period, falling 2.2%, according to data compiled by Bloomberg.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.97 trillion in assets as of June 30.