'New normal' growing old: Pimco

Era of sluggish growth characterized by Bill Gross as the “new normal” is ending, according to one of the firm's deputy CIOs

Apr 25, 2014 @ 1:26 pm

new normal, bill gross, pimco, economy, el-erian, interest rates, yield
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The era of sluggish growth characterized by Pacific Investment Management Co. as the “new normal” is ending, according to one of the firm's deputy chief investment officers.

“Our view is that what you'll see in next the few years is, we're going to head back to a new destination,” said Scott Mather, head of global fund management and one of Pimco's six deputy chief investment officers. The firm's forecast for U.S. growth has increased to the high 2% level, “which is better than sub-2% level of growth that we've experienced for several years,” Mr. Mather said.

Pimco, manager of the world's largest bond fund, outlined the “new normal” scenario at its annual forum in May 2009 after the worst financial crisis since the Great Depression plunged the U.S. into recession. The co-founder and co-chief investment officer Bill Gross and the firm's former chief executive Mohamed El-Erian popularized the term and predicted the economy would expand at a below-average pace for the next three to five years as growth in developed countries slowed and amid the “heavy hand of government.”

“We've already left the most intense period of deleveraging that really created all sorts of pressures and adjustments that needed to happen in the economy,” Mr. Mather said Friday.

INCREASING OPTIMISM

Pimco has been moving toward a more optimistic view of the economy since at least the beginning of 2013. In a March outlook, it forecast U.S. growth of between 2.5% and 3%, as public sector revenues increased, pressures from taxes eased and consumption improved.

This moved the firm more in line with other economists, who project U.S. gross domestic product expansion of 2.7% in 2014, according to the average estimate of 78 responses in a Bloomberg survey. The U.S. grew 1.9% last year after expanding 2.8% in 2012.

Americans are growing more upbeat about the economy as near-record stock prices, higher property values and lower unemployment help bolster household finances. Further strides in the labor market that generate bigger wage gains would provide additional impetus for the consumer spending that makes up almost 70% of the economy.

The yield on the ten-year U.S. Treasury should settle at around 4% over the next few years, Mr. Mather said. Analysts forecast a 3.72% yield by the third quarter of next year, according to the weighted average estimate of 50 analysts in a Bloomberg survey.

Benchmark 10-year note yields fell 2 basis points to 2.66% at midday Friday, according to Bloomberg Bond Trader prices. A rally in 30-year bonds has pushed returns past 10% in 2014, the best start to a year in at least two and a half decades.

Mr. Mather, who joined Pimco in 1998 after trading mortgage-backed securities at the Goldman Sachs Group Inc., has emerged as part of a new generation of top executives at Pimco, the $1.9 trillion bond firm that revisited its leadership plans after the unexpected resignation of Mr. El-Erian, the heirr-apparent.

Mr. Gross named Mr. Mather a deputy CIO in January, along with Andrew Balls, Dan Ivascyn, Mark Kiesel, Virginie Maisonneuve and Mihir Worah as part of the biggest management shakeup in Pimco's history.

GROSS STUMBLE

Mr. Gross has stumbled in the past year after building one of the best long-term track records in the industry during the bull market. Since the 70-year-old examined his legacy in an investment outlook a year ago titled “Man in the Mirror,” his $232 billion Pimco Total Return Fund has trailed 90% of similar funds. Over the past five years, the fund is beating 56% of peers.

Mr. El-Erian this week reaffirmed the idea of a “new normal” economy in his first television interview since his departure in March, saying that the markets are in “secular stagnation.” While the U.S. economy is healing, Federal Reserve Chairman Janet Yellen won't raise interest rates for a while, he said.

(Bloomberg News)

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