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

+ Zoom

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)


What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video


Carson Group's Schaben: Making sense of millennials

Lazy, entitled, the trophy generation: These are stereotypes most often associated with millennials. But why are these myths and not realities. Carson Group's Aaron Schaben explains.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

Trump rejects idea of new caps on 401(k) savings in tax plan

GOP reportedly had been considering reducing the cap on the annual amount workers can set aside for 401(k)s.

Finra's stats reveal an industry in decline

The broker-dealer regulator reports fewer entities under its watchful eye.

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print