Tags: Pimco | Gross | Rates | Savers

Pimco’s Gross: Low Rates Will Punish Savers for Years

Monday, 05 March 2012 11:39 AM

Interest rates could stay depressed for more than a decade, warns bond guru Bill Gross, a trend which would harm seniors and other savers while allowing the government to escape the cost of overspending, a strategy known as “financial repression.”

Governments have long relied on using the printing press to create money. That keeps rates lower than the market would like, even lower than the reported inflation rate. Over time, the decimation of the real buying power of a currency can “inflate away” public sector debt.

“For our way of thinking, we are going to see that for a long, long time. It does not mean that the Fed has to stay at 25 basis points forever, but it does mean that the saver will be restricted or repressed for 5, 10, 15 years,” Gross told Bloomberg TV in an interview.

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Gross is the founder and co-chief investment officer of bond giant Pimco. The money management firm recently launched an exchange-traded fund (ETF) version of its popular Pimco Total Return fund. Called the PIMCO Total Return Exchange-Traded Fund (TRXT), the new fund charges its holders 0.55 percent.

Gross warned, however, that bond investors should change their long-held view that the market will continue its long run upward.

“We’ve had a 30-year run from 1981 when Treasuries started at 14.5 percent on the 30-Year down to 3 percent or above 3 percent now. That has produced what we called and labeled in our fund Total Return. That being yield plus capital appreciation,” Gross said.

“When you get down to the bottom in terms of yield, then the price gains and the capital gain additions that have, to a certain extent, not falsely acclimated bond investors but provided a little bit of an illusion for the past 30 years. It starts to reverse so you want to become defensive as opposed to offensive. You want to protect capital as opposed to expand it.”

St. Louis Federal Reserve Bank President James Bullard, in a recent speech, seemed to discount continued bond buying by the Fed in order to keep rates low.

"I think the data is coming stronger on the U.S. economy. I think it's a good time to wait and see and gather more data, get a better read on what's going on in Europe, and see what is going to happen next," he told reporters Friday.

More Fed bond purchases would achieve that purpose, he said. However, interest rates already are at nearly zero and the Fed has promised to keep them very low through 2014.

“We already have a lot of things on the table," Bullard said.

Editor's Note: Obama Donor Banned This Video But You Can Watch it Here

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