Gross: Buy short-term debt investments

Pacific Investment Management Co.'s Bill Gross, manager of the world's biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the Federal Reserve's intent to keep benchmark lending rates at almost zero. “The safest pitch to swing at may not be stocks, but the asset that will soon be the nearly sole focus of central banks,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco's website today. “Instead of QE, central bankers are shifting to forward guidance, which if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns.” Gross's Pimco Total Return Fund has dropped more than $41 billion, or 14 percent of its assets, during the past four months through losses and investor withdrawals. The fund suffered $7.7 billion in net redemptions in August, Chicago- based researcher Morningstar Inc. said yesterday in an e-mailed statement, the fourth straight month of withdrawals and the second highest amount this year. In December, Chairman Ben S. Bernanke moved the Fed further into uncharted policy territory in combating joblessness by tying the bank's interest-rate outlook to unemployment and inflation, known as their forward-guidance policy. Policy makers at the Fed, which are buying $85 billion in mortgage and Treasuries in its most recent quantitative easing program, have focused more at recent policy meeting on forward guidance in part to assure financial markets that policy will remain accommodating for many years, even as it may scale back bond buying.

Fed Policy

The Fed is likely to reduce its monthly purchases as soon as this month's policy meeting, according to a Bloomberg survey taken last month. The central bank's target rate has been set in a range of zero to 0.25 percent since December 2008. “If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark,” Gross wrote. “While, low, they can at least form the basis for curve rolldown and volatility strategies that have higher return/risk ratios than alternative carry options, such as duration, credit or currency.” Central bankers last year for the first time linked their interest-rate outlook to economic thresholds, saying rates will stay low “at least as long” as unemployment remains above 6.5 percent and if the Fed projects inflation of no more than 2.5 percent one or two years in the future. Fed officials don't see joblessness falling near that goal until 2015.

Growth Watch

The Federal Open Market Committee is debating whether growth is sufficient to fuel steady improvement in the job market and warrant tapering the Fed's monthly bond buying. Speculation the FOMC will dial down purchases at its Sept. 17-18 meeting has roiled financial markets, pushing up U.S. bond yields and contributing to the worst rout in the currencies of developing nations in five years. Gross also recommended investors buy Treasury Inflation Protected Securities, known as TIPS, as a hedge against the risk that expansionary government and monetary policy could eventually spark inflation. The performance of the $251 billion Total Return Fund puts it behind 51 percent of similarly managed funds through during the past year, falling 2.2 percent, according to data compiled by Bloomberg. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.97 trillion in assets as of June 30. (Bloomberg News>