Tags: bill gross | inflation | treasury bonds | fed janet yellen

Bill Gross: Treasurys Held Back by Yellen's Flawed Inflation Fear

Image: Bill Gross: Treasurys Held Back by Yellen's Flawed Inflation Fear

Thursday, 17 Dec 2015 10:10 AM

Treasurys climbed, more than recouping losses sustained after the Federal Reserve raised interest rates Wednesday, as Bill Gross said Janet Yellen is overly concerned about inflation.

Fed Chair Yellen increased the benchmark U.S. interest rate and said policy makers were confident inflation would accelerate toward their 2 percent target over the medium term. U.S. consumer-price growth has been stuck near zero all year. Gross, the former manager of the world’s biggest bond fund who’s now at Janus Capital Group Inc., said Yellen would have trouble moving rates more than one more time.

“Two and wait I think is probably what we’re going to see,” Gross, who is based in Newport Beach, said in an interview Wednesday in the U.S. “She’s going to be waiting on inflation hitting 2 percent for a long, long time.”

The benchmark 10-year note yield dropped five basis points, or 0.05 percentage point, to 2.25 percent at 8:51 a.m. New York time, after rising by three basis points on Wednesday, according to Bloomberg Bond Trader data. The 2.25 percent note maturing in November 2025 climbed 13/32, or $4.06 per $1,000 face amount, to 100.

U.S. government securities have returned 0.8 percent this year through Wednesday, with the gain slowing from 6.2 percent in 2014, according to Bloomberg World Bond Indexes.

Not everyone agrees with Gross. Inflation is set to rise and investors need to reconsider their positions, according to Francesco Garzarelli, co-head of macro and markets research at Goldman Sachs Group Inc. in London.

Investor demand for a defense against rising costs will be tested Thursday when the U.S. sells $16 billion of five-year Treasury Inflation Protected Securities. Buyers at the previous sale in August bid for 2.6 times the amount available, matching the average for the past five years.

“Inflation compensation will go up, so anything like TIPS or swaps on inflation” would be a good buy, Garzarelli said in an interview on Bloomberg Television’s “On The Move” with Guy Johnson and Jonathan Ferro. “If you take 10-year break-even inflation which closed last night at 1.5 percent, that’s 50 basis points off.”

Goldman sees the break-even rate, which measures the difference between yields on 10-year inflation-indexed securities and nominal equivalents, jumping to 2 percentage points. It was at 1.48 percentage points on Thursday.

Smooth Running

The Fed rate increase will help financial markets function more smoothly, said Rick Rieder, chief investment officer of fundamental fixed income at BlackRock Inc., the world’s largest money manager with $4.5 trillion in assets.

“The Fed has made the right move for the economy and markets,” Rieder, who’s based in New York, wrote in a report. “Both the economy and markets benefit from greater certainty and clarity over the path of interest rates, and uncertainty over that policy path in the past year has generated a considerable amount of market turmoil.” 

Gross says Yellen isn’t giving enough emphasis to Japan, commodity prices and European Central Bank policy, which are all helping keep inflation in check. Japan and Europe are both buying bonds in their regions to try to stave off deflation. The Bloomberg Commodity Index dropped to a 16-year low on Thursday.

“The Fed basically is living in an old age, as opposed to a new age: a new age that’s reflective of high leverage, it’s reflective of globalization, reflective of factors in terms of demographics that are pushing down inflation,” Gross said.


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Treasurys climbed, more than recouping losses sustained after the Federal Reserve raised interest rates Wednesday, as Bill Gross said Janet Yellen is overly concerned about inflation.
bill gross, inflation, treasury bonds, fed janet yellen
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2015-10-17
Thursday, 17 Dec 2015 10:10 AM
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