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Pimco's Gross: Employment Report a Signal For More Fed Easing

Friday, 08 October 2010 11:02 AM

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said a larger-than-forecast loss of U.S. jobs indicates the Federal Reserve will buy more debt to stimulate the economy.

The September employment report “is simply a signal, a strong, strong signal for Fed QE2,” Gross said, referring to the purchase of fixed-income securities to drive down borrowing costs in the policy know as quantitative easing. “We will respond by riding the wave and then trying to anticipate when to get off. There is a certain point in terms of yield levels where it no longer makes sense.”

Yields on Treasuries maturing in five years and less have tumbled to record lows since Fed officials hinted in August about renewed purchases when saying they would begin reinvesting proceeds from maturing mortgage holdings back into Treasuries to keep money from leaving the financial system. Policy makers completed purchases of about $1.7 trillion of debt in March.

The central bank may buy about $100 billion in government debt a month, or $1.2 trillion over the next year, in a resumption of quantitative easing, Gross said in a radio interview today on “Bloomberg Surveillance” with Tom Keene.

Federal Reserve Bank of New York President William Dudley said Oct. 1 that the outlook for U.S. job growth and inflation is “unacceptable” and that the Fed will probably need to take action to spur the recovery and avert deflation.

Inflation Target

Employers cut staffing by 95,000 workers after a revised 57,000 decrease in August, Labor Department figures in Washington showed today. The median estimate of economists surveyed by Bloomberg News called for a 5,000 drop. The unemployment rate held at 9.6 percent.

“Dudley spoke to 2 percent in terms of inflation target and he meant that the under level of inflation that we’ve been attaining for the past 12 to 18 months would have to be made up,” Gross said. “In other words, he would be willing to accept more than 2 percent inflation for a 12- to 18- to 24- month period of time in order to get back to that target.”

That echoes comments from International Monetary Fund Chief Economist Olivier Blanchard in February, who told the Wall Street Journal that he would “strongly argue” for an inflation target of 4 percent, instead of the 2 percent favored by most policy makers. Higher inflation would give central bankers more room to adjust rates and make them less reliant on fiscal policy, Blanchard said. The Fed should probably follow such a strategy, Gross said.

Favorable for Stocks

“Certainly for the next several years in order to get back to that 2 percent level,” Gross said. “If and when we do that, then that’s a very favorable type of proposal for risk assets that wheel off inflation -- in other words stocks.”

Yields on two-year Treasury notes, which touched a record low of 0.3351 percent today, have already fallen to levels that makes them no longer attractive, and the three-year note yields are approaching the same, Gross said.

“On the other side, the 30 years are reflecting the potential impact of inflationary policies from QE2 and they are widening out,” Gross added in the interview.

“What an investor wants to do, if you are buying Treasuries, is to buy the middle, 5’s, 6’s and 7-” year notes, Gross said in the interview.

Gross reduced the $252 billion Total Return Fund investment in government-related debt to 36 percent of assets in August, from 54 percent the previous month, according to the latest available data on the website of Newport Beach, California-based Pimco. That equaled the lowest amount since April. The fund also boosted mortgage debt to 21 percent from 18 percent, the most since September 2009. Pimco doesn’t comment directly on monthly changes in portfolio holdings.

Dollar Decline

The dollar dropped below 82 yen for the first time since 1995 after the payrolls report, with the greenback was headed for a fourth weekly decline against the euro as the weak labor market encouraged speculation additional Fed asset purchases will debase the currency.

Even as the Fed is easing policy to bolster growth, the U.S. actually wants a weaker dollar, according to Gross. A weaker currency can boost exports, and stimulate economic growth.

“Both Japan and the U.S. and of course the U.K. to come, are engaged in this second and third rounds of quantitative easing,” Gross said in the interview. “Now it’s a question of who is printing the most. The yen strengthened today under the assumption that the U.S. will print more than Japan on a relative basis.”

Market Performance

The Total Return Fund returned 11 percent in the past 12 months, beating 82 percent of its peers, according to data compiled by Bloomberg. It gained 1.8 percent over the past month, a performance superior to 80 percent of competitors. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.1 trillion of assets as of June 30.

Pimco’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the firm’s website.

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Bill Gross, who runs the world s biggest bond fund at Pacific Investment Management Co., said a larger-than-forecast loss of U.S. jobs indicates the Federal Reserve will buy more debt to stimulate the economy. The September employment report is simply a signal, a strong,...
Friday, 08 October 2010 11:02 AM
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