Tags: Pimco | Fed | Rates | Low

Pimco's Gross: Fed to Keep Rates Low for Even Longer With Job Growth

Friday, 02 Dec 2011 01:56 PM

Pacific Investment Management Co.’s Bill Gross said U.S. employment growth won’t prevent the Federal Reserve from signaling that borrowing rates will remain lower longer than policy makers have already indicated.

The Fed will keep the target rate for overnight loans at current levels for as long as four years, up from the through the middle of 2013 period outlined, Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

Unemployment in the U.S. unexpectedly dropped in November to a two-year low, while employers added fewer workers than projected and earnings eased, indicating the labor market is making limited progress. The jobless rate dropped to 8.6 percent, the lowest since March 2009, from 9 percent, Labor Department figures showed today in Washington.

The economy still has “some slogging to do here,” Gross said from Pimco’s headquarters in Newport Beach, California. “The Fed is focusing on the problems in euro land and the potential lock-up of the financial markets. The QE3 that I expect is really not an increased amount of purchasing in terms of the Fed’s balance sheet but an extended period language that allows the market to anticipate a two, three, or four years period of time where fed funds stay at 25 basis points.”

The Fed has held its target rate for overnight loans in a zero to 0.25 percent range since December 2008 and pledged in August to hold its key rate steady at least until mid-2013. The central bank also purchased $1.7 trillion of Treasury and mortgage debt between December 2008 and March 2010, and the $600 billion of Treasuries from November through June and began this quarter extending the maturity of it debt holdings.

Payroll Gains

Six central banks led by the Fed made it cheaper this week for banks to borrow dollars in emergencies in a global effort to ease Europe’s sovereign-debt crisis. The yield on Italy’s 10-year bond is still close to 7 percent as the debt crisis spreads to the region’s core countries.

U.S. payrolls climbed 120,000, with more than half the hiring coming from retailers and temporary help agencies, after a revised 100,000 rise in October that was more than initially estimated. The median estimate in a Bloomberg News survey called for a gain of 125,000.

The benchmark U.S. 10-year note yield rose three basis points, or 0.03 percentage point, to 2.12 percent, according to Bloomberg Bond Trader prices. The yield on the 30-year bond was little changed at 3.11 percent.

‘Reflationary Efforts’

Yields on longer-maturity debt are likely to rise the most if the economy continues to show signs of strength, Gross said.

“The Fed is going to stay low for a long, long time, and that keeps twos and fives and actually tens fairly well anchored,” Gross said. “But it’s the 30-year that will reflect these reflationary efforts not only from the Fed but from the ECB” and other European central banks working in conjunction with the International Monetary Fund to support the highly- indebted peripheral European nations.

A European proposal to channel central bank loans through the IMF may deliver as much as 200 billion euros ($270 billion) to fight the debt crisis, two people familiar with the negotiations said today.

At a Nov. 29 meeting attended by European Central Bank President Mario Draghi, euro-area finance ministers gave the go-ahead for work on the plan, said the people, who declined to be named because the talks are at an early stage. The need for a new crisis-containment tool emerged as the effort to boost the 440 billion-euro rescue fund to 1 trillion euros fell short.

Printing Money

Under the proposal, national central banks would recycle funds through the IMF, potentially to underwrite precautionary lending programs for Italy or Spain, the two countries judged to be the most vulnerable now, the people said.

“There is going to be a lot of money printed and to the extent that it results in reflation not just in the euro zone but in the United States then it’s the long end that might be vulnerable,” Gross said.

Gross’s $244 billion Total Return Fund has gained 2.49 percent this year, trailing 76 percent of peers. The fund has returned an average of 7.47 percent over the past five years to beat 97 percent of rivals, according to data compiled by Bloomberg.

Gross advised investors to keep their money in only the safest investments, such as government debt of the U.S. or Canada, or even in cash. High-dividend paying shares from companies such as Coca-Cola Co. and Procter & Gamble Co. are also attractive, he said.

“To the extent that you can get 3.5 or 4 percent from an electric utility or a Coke or a Procter and a very stable cash-flow-type of company relative to 2 percent 10-year Treasury,” it’s an attractive investment, Gross said. “One has to be suspicious in terms of the risk premium because markets go up 2 or 3 percent a day.”

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Pacific Investment Management Co. s Bill Gross said U.S. employment growth won t prevent the Federal Reserve from signaling that borrowing rates will remain lower longer than policy makers have already indicated.The Fed will keep the target rate for overnight loans at...
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Friday, 02 Dec 2011 01:56 PM
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