Tags: pimco | gross | reflation | yield

Pimco's Gross: Reflation Boosting Long-Term Bond Yields

Monday, 10 September 2012 10:01 PM

Long-term bond yields will be higher than short-term rates in the U.S. and Europe because of reflation, according to Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co.

Bond yield curves will be “very steep” for “a very long time,” Gross wrote in a Twitter post Monday. A period of reflation is under way, he wrote. Investors should expect “higher long rates” and “low short rates,” according to Gross, who is based in Newport Beach, California.

So-called yield curves are already steepening in the U.S. and Germany. The gap between 10- and 30-year U.S. rates widened to as much as 1.18 percentage points Monday, the most since May. Thirty-year bonds, because of their long maturity, are more sensitive to inflation than shorter-term Treasurys.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

The spread between 10- and 30- year German yields was 85 basis points Monday. The difference was as wide as 91 basis points on July 24, the most since September 2011.

European Central Bank President Mario Draghi on Sept. 6 announced an unlimited bond-purchase program to gain control of interest rates in the euro region. Weaker-than-expected U.S. job growth in August has fueled bets the Federal Reserve will add more stimulus to the economy through bond purchases when it meets this week.

Fed Bets

The Fed will give “strong hints” or provide “positive action” at this week’s Federal Open Market Committee meeting, Gross said in a Sept. 7 radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. The central bank will likely ease further through “open-ended” purchases of Treasurys and mortgages and extend its pledge to keep interest rates low into 2015, he said.

Payrolls rose a less-than-projected 96,000 in August and the unemployment rate declined as more Americans left the labor force, indicating the employment market is stagnating. Fed Chairman Ben S. Bernanke said in an Aug. 31 speech in Jackson Hole, Wyoming, the central bank will provide more stimulus as needed to promote a stronger economic recovery.

The Fed has expanded its balance sheet with two rounds of quantitative easing, purchasing $2.3 trillion of assets between December 2008 and June 2011.

Pimco’s Total Return Fund gained 8.5 percent during the past year, beating 93 percent of its peers, according to data compiled by Bloomberg. The fund gained 0.9 percent in the past month, topping 92 percent of comparable funds.

Inflation Expectations

Investors should “continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades,” Gross wrote in his monthly investment outlook on Pimco’s website on July 31.

The difference between yields on 10-year notes and same- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, has widened to 2.38 percentage points from 1.95 percentage points at the end of 2011. The average over the past decade is 2.16 percentage points.

Inflation isn’t a danger yet, according to Marc Fovinci, head of fixed income in Portland, Oregon at Ferguson Wellman Capital Management Inc., which has $3.1 billion in assets.

“That risk is there, but it’s at least many months, if not years, down the road,” Fovinci said.

“As noted in the yield curve, we’re seeing a little bit of steepening. But the U.S. economy is just too weak to spur prices on if retailers and sellers of whatever goods don’t have customers who are willing to pay higher prices.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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Monday, 10 September 2012 10:01 PM
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