Gross: No asset bubbles given Fed neutral policy rate of 2%

Bill Gross said asset markets from stocks to real estate are not overpriced because the Federal Reserve's long-term policy rate will be half of what policy makers are forecasting.

Apr 30, 2014 @ 11:10 am

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Pacific Investment Management Co.'s Bill Gross said asset markets from stocks to real estate are not overpriced because the Federal Reserve's long-term policy rate will be half of what policymakers are forecasting.

“Estimates which average less than 2 percent are much closer to financial reality than the average 4% 'blue-dot' estimates” of Fed policymakers, Mr. Gross wrote in his monthly investment outlook posted on Pimco's website today. He was referring to the Fed's neutral policy rate, a level that would be consistent with full employment, growth and stable prices.

The Fed's March summary of policymakers' economic projections, or SEP, had a median estimate for the long-run policy rate of 4%, unchanged from the December report. The median forecast was for the federal funds rate to move to 1% in December 2015 and 2.25 percent a year later. That compared with estimates in December of 0.75% and 1.75%.

Mr. Gross has stumbled in the past year after building one of the best long-term track records in the industry. Over the past year, his $232 billion Pimco Total Return Fund, the world's largest bond fund, has lost 1.85%, trailing 90% of similar funds. Over the past five years, the fund is beating 57% of peers.


While investors don't face the risk of market bubbles if the long-run Fed policy rate proves lower than Fed officials now foresee, they will suffer from lower-than-average returns, Mr. Gross wrote. Pension-fund assumptions of 7% to 8% total returns will prove too high, he wrote.

“Still there are ways to fight back — most of which involve taking different risks than you may be commonly used to taking: alternative assets, hedge funds, leveraged closed-end funds, a higher proportion of stocks versus bonds in a personal portfolio,” he wrote. “All of these alternatives are potentially higher-returning assets in a world of 2% policy rates where cash is a poor-performing asset, but likewise a cheap liability that can be borrowed to an investor's advantage.”

Implied yields on federal funds futures traded at the CME Group Inc. exchange signal a 51$ probability the Fed will first increase its target rate in June 2015, according to calculations available on the exchange's website.

Fed policymakers have cut their monthly debt buying by $10 billion increments at each of their last three meetings, lowering it to $55 billion. The Federal Open Market Committee will complete a two-day policy meeting today and probably will continue with reductions at that pace and end the program in October, economists said in a Bloomberg News survey last month.

(Bloomberg News)


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