Tags: Gross | Pimco | yield | unemployment

Pimco's Gross: 10-Year Yield May Return to 2.4 Percent With PCE Low

Friday, 07 February 2014 01:42 PM

Pacific Investment Management Co.’s Bill Gross said 10-year Treasury yields can fall further if labor growth holds subdued as seen in hiring last month and a key inflation gauge stays below the Federal Reserve’s target.

“If the inflation stays at 1.1, 1.2 or 1.3 percent, then the Fed can stay where they are and the 10-year can move to 2.4 percent,” Gross, manager of the world’s biggest bond fund, said during a radio interview on “Bloomberg Surveillance” with Tom Keene and Michael McKee.

“You can’t have a strong economy unless there are willing borrowers and willing lenders and credit expands in order to expand gross domestic product. It just doesn’t happen that way at a tepid credit growth rate” that we have had since Lehman Brothers Holdings Inc. collapsed in 2008.

Payrolls in the U.S. rose less than projected in January as retailers cut back after the holidays and government hiring fell. The unemployment rate unexpectedly declined to 6.6 percent.

The 113,000 gain in employment followed a revised 75,000 increase the prior month, Labor Department figures showed. The median forecast of economists in a Bloomberg survey called for a 180,000 advance.

The Fed’s preferred inflation measure, the personal consumption expenditures index, showed prices rose 1.1 percent in the 12 months ended in December. The gauge, known as PCE, hasn’t been above the Fed’s goal of 2 percent since April 2012.

Growth Target

“Ultimately unemployment will fade into the background and the PCE will be key,” for the Fed, Gross said.

“At some point, I think the Fed moves forward to a nominal GDP target because that’s real growth and that’s real inflation. And if you can produce 4 to 5 percent nominal growth, then you are almost back to normal.”

The U.S. unemployment rate dropped last month to the lowest level since October 2008 even as more Americans entered the labor force. The unemployment rate, which is derived from a separate Labor Department survey of households than the payrolls tally, was projected to hold at 6.7 percent, according to the survey median. The so-called participation rate rose to 63 percent from 62.8 percent even as more people entered the labor force.

Treasury 10-year note yields fell for the first time in four days, sinking as much as seven basis points, or 0.07 percentage point, before trading at 2.67 percent at 9:54 a.m. in New York, down three basis points, according to Bloomberg Bond Trader prices. Ten-year yields last touched 2.4 percent in June.

The Bloomberg U.S. Treasury Bond Index has gained 1.6 percent this year as a drop in risk appetite and a rout in emerging-market currencies have boosted haven demand.

“Investors should realize that returns going forward are going to be a lot less than returns in the past,” Gross said in the radio interview.

The performance of the $237 billion Total Return Fund over the past three years puts it ahead of 67 percent of similarly managed funds, gaining 4.7 percent on average over the period, according to data compiled by Bloomberg.

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Pacific Investment Management Co.'s Bill Gross said 10-year Treasury yields can fall further if labor growth holds subdued as seen in hiring last month and a key inflation gauge stays below the Federal Reserve's target.
Friday, 07 February 2014 01:42 PM
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