Tags: gross | pimco | bond | baby-boomer

Pimco's Gross: Bonds Appeal to Risk-Averse Baby-Boomers

Sunday, 26 Feb 2012 01:02 PM

U.S. Treasury bonds are sure losers, after taxes and inflation. So why do people buy them at all? Because Americans are getting older and can’t risk losing their hard-earned nest eggs, says Bill Gross, founder and co-chief investment officer of bond giant Pimco.

“If the Fed is good to its promise, then interest rates aren’t going anywhere for the next two or three years. Does a 3 percent yield from a longer-term Treasury, and a 2 percent yield from a medium-term Treasury, does that represent value? Not really,” Gross told Bloomberg TV in an interview. “Certainly, the saver and investor is being hair-cutted, in historical terms.”

A 2 percent return in a taxable account, once you figure in the impact of those taxes and inflation, is negative — an obviously bad investment. However, consider the case of Ford Motor Co., which is busily buying bonds with its corporate cash, Gross said.

Why would Ford sign on to a certain loss? Because of the certainty that the money will not disappear, as might happen in riskier investments, such as equities. Baby Boomer retirees might like the idea of buying dividend-paying stocks that pay a higher rate, but they can’t take the risk, Gross explained.

“Stocks can do go down too, just like bonds. Demographically, boomers prefer certainty as opposed to speculative capital gain.” Gross said. “They're beginning to get older and require more certainty. Do they find appeal in a Johnson & Johnson at 3.5 percent dividend yield with growth potential? Sure they do, but they also believe they want that money back, and if there is a 2008 and 2009 scenario, perhaps they won't. So there are demographic tradeoffs here that have to be considered."

While the Fed is on the record promising low rates through late 2014, that isn’t necessarily the same as adding to the pile of printed money already in hand.

Stocks have risen in part on speculation that the Fed might embark on a third round of its controversial easing program. James Bullard, the head of the St. Louis Federal Reserve, said recently it’s time for the bank to hold off.

Bullard is a voting member starting in 2013. He thinks the economy could grow by 3 percent in 2012, and that jobless rates might fall below 8 percent.

"The data is better, so it's a natural time for the committee to be on pause for a while," Bullard told CNBC. "We've already got a very easy monetary policy."

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2012-02-26
Sunday, 26 Feb 2012 01:02 PM
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