Government check-writing also the likely end of 30-year bull run in debt market, says bond king
Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co., said a renewal of asset purchases by the Federal Reserve will likely signify the end of the 30-year bull market in bonds.
“Check writing in the trillions is not a bondholder's friend,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco's website today. “It is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up.”
The Fed will announce another round of large-scale asset purchases when policy makers meet next week after deploying $1.7 trillion to pull the economy out of the financial crisis, according to a survey of the 18 primary dealers that trade debt with the central bank. Fed officials, who already cut interest rates almost to zero, are discussing more purchases of Treasuries to flood markets with cheap money as well as strategies for raising inflation expectations to prevent stagnating prices from undermining the recovery.
Gross, the co-founder of Pimco, said in March that bonds may have seen their best days while making an argument for investors to own fewer. He reduced holdings of government- related debt in the Total Return Fund for the third straight month in September, after the securities accounted for 63 percent of assets in June, the highest since it held an equal amount in October 2009.
The $252 billion Total Return Fund's investment in government debt was cut to 33 percent of assets in September, from 36 percent the previous month, according to the company's website. Pimco doesn't comment directly on monthly changes in portfolio holdings.
The yield on the 10-year Treasury note dropped from a 2010 high of 4.01 percent in April to a low of 2.33 percent on Oct. 8, according to Bloomberg data, as investors purchased Treasuries in anticipation of further asset purchases by the central bank. The record of 2.04 percent was set in December 2008.
“Having arrived at its destination, the market then offers near zero percent returns and a picking of the creditor's pocket via inflation and negative real interest rates,” Gross wrote. “It will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment,” Gross wrote.
Treasuries have returned 8.3 percent this year after losing 3.7 percent in 2009, according to Bank of America Merrill Lynch indexes.
Under what Pimco calls the “new normal,” investors should expect lower-than-average historical returns with heightened regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.
“If QEII cannot reflate capital markets, if it can't produce 2 percent inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity,” Gross wrote.
The Total Return Fund, also the world's biggest mutual fund, handed investors a gain of about 11.78 percent in the past year, beating about 76 percent of its peers, according to data compiled by Bloomberg. Pimco, a unit of Munich-based insurer Allianz SE, managed $1.1 trillion of assets as of June 30.
