Gross: Focus on shorter maturities as inflation trumps jobs

Bond manager expects Federal Reserve's benchmark rate to hold at almost zero until at least 2016

Jan 9, 2014 @ 9:06 am

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, Mr. Gross, manager of the world's biggest bond fund, wrote in his monthly investment outlook posted on Pimco's website Thursday.

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,” he 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 cutting $10 billion from 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% and the outlook for inflation doesn't exceed 2.5%.

'LESS DURATION'

“Investors should own bonds with less duration and shorter maturities,” when rates may be moving higher, wrote Mr. Gross, who has advocated over the last few months that investors focus on Treasury debt with maturities around five years.

The performance of Pimco's $237 billion Total Return Fund puts it behind 72% of similarly managed funds over the last year, with a loss of 1.85%, 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% for the 12-month period ending November, more than a percentage point below the Fed's 2 percent target. Some participants said inflation was unlikely to slow further.

'MERRY BAND'

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 the 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 incoming 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, Mr. Gross wrote.

“No policy rate hike until both unemployment and inflation thresholds have been breached and even then 'they're not thresholds,'" he wrote.

“Miles to go before” anyone “has to begin to worry about a policy rate hike,” Mr. Gross wrote. “2016 at the earliest.”

(Bloomberg News)

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Advisers beware: tax law has unintended consequences

Commission accounts could be preferable for some clients, and advisers could be incentivized to move from employee broker-dealers to independent channels.

Recommended Video

Path to growth

Latest news & opinion

Lightyear Capital takes 50% stake in $9 billion HPM Partners

Private equity backing could fuel acquisitions by the large RIA.

Tax reform: 7 essential strategies for financial advisers

While advisers face the difficult task of analyzing the law's impact, they will also have a significant opportunity to prove their value by implementing money-saving strategies for clients as well as their own businesses.

Tax law: Everything advisers need to know about the pass-through provision

The provision is tricky, but could provide advisers and business-owner clients with sizable tax savings.

Bill requiring fiduciary disclosure reintroduced in New Jersey

Measures would obligate financial advisers to tell clients they do not have to act in their best interests.

Merrill Lynch to let advisers text with clients

Texting has been a popular mode of communication for years, but in the past the firm's regulations have prevented advisers from using it.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print