The worst of the credit crisis may be over regarding harm to bank balance sheets, Bill Gross, manager of the world's biggest bond fund, said Friday.
Bank stocks on both sides of the Atlantic have been severely battered this week as financial institutions continue to scour for capital. Some have had to draw on yet more government cash amid the worst financial crisis since the Great Depression.
"We have probably seen the worst of the credit crisis from the standpoint of the banking balance sheets to the extent that they've already received a lot of capital and are going to get some more," said Bill Gross, founder and co-chief investment officer at Pacific Investment Management Co (Pimco). Gross was interviewed by video link from the company's headquarters in Newport Beach, California.
Gross added there is a need to do whatever is required to get banks lending again. To stem more waves of bank losses, U.S. house prices must find a bottom.
The damage to corporate bond markets is far from over, with high-yield bonds at particular risk of rising defaults.
"We haven't seen the worst of it (the credit crisis) from the standpoint of defaults, in terms of the high-yield market and small corporations. ... The worst is ahead for the real economy," he said.
Still, Gross said he is not bearish on mortgage-backed securities (MBS), despite having trimmed his $132 billion flagship fund's holdings of these securities in December. Pimco still has sizable holdings of mortgage bonds, he added.
As reported earlier, the PIMCO Total Return Fund, the world's largest bond mutual fund, reported sharply reduced holdings of mortgage-backed securities in December based on market value, while cash and Treasury investments rose, according to the fund's website.
Investments in MBS issued by companies such as Fannie Mae fell to 62 percent of its portfolio last month from 81 percent in November, a chart showed.
Allocation to government debt rose to 9 percent from a negative 4 percent based on market value, while cash grew to 4 percent from 1 percent, it said.
Asked in the interview with Reuters whether he was concerned about some analysts' view that the Treasury market is in a bubble, Gross said U.S. government securities would still find buyers over the next 12 months, prospectively including the Federal Reserve, which has signaled it is considering buying longer-maturity Treasuries.
Asked about Treasury Inflation Protected Securities (TIPS), Gross said he considered these bonds attractive, with real yields of about 2 percent.
He also said the U.S. government should return to the original intent of the Troubled Asset Relief Program (TARP) to buy tarnished assets. Pimco is in a good position to advise the government on purchases of subprime mortgage-related assets, he said.
On U.S. municipal bonds, Gross said he expected the incoming administration of President-elect Barack Obama to unveil a substantial assistance package to municipalities over the next one to three weeks. Municipal bonds yielding between 5.5 percent and 6 percent are an "extraordinary opportunity" for investors, he said.
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