Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the Federal Reserve’s zero-bound interest rate policy and quantitative easing programs are becoming more of a problem for an economy that needs structural reforms.
The Fed’s polices are “desperately attempting to cure an economy that requires structural as opposed to monetary solutions,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website.
“Central banks, including today’s superquant Kuroda, leading the Bank of Japan, seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect.”
The Fed is purchasing $85 billion a month in Treasurys and mortgage debt as part of its third round of quantitative easing, which began after it dropped its benchmark rate to almost zero to lift the economy out of recession. The central bank cut its target rate for overnight loans to a range of zero to 0.25 percent in December of 2008.
Haruhiko Kuroda, governor of the BOJ, is pursuing unprecedented stimulus to jolt Japan out of deflation. The European Central Bank cut its benchmark rate by 0.25 percentage point to a record 0.5 percent on May 2, and speculation has mounted that the Bank of England will increase its bond-buying target after Mark Carney takes over as governor next month.
The Fed holds more than $3 trillion in assets on its balance sheet as a result of three rounds of quantitative easing, up from about $900 billion in 2007.
“Low yields, low carry, future low expected returns have increasingly negative effects on the real economy,” Gross wrote. “Credit expansion in the private economy is restricted by an expanding Fed balance sheet and the limits on Treasury” repurchase agreements.
Gross advised investors reduce risk and carry-related assets, referring to assets that have a higher perceived risk than securities such as Treasurys or longer-term debt.
Gross said May 16 that fixed income’s three-decade bull market “was over.” He said on May 31 that Pimco likes Treasurys that mature in five to 10 years, as there will be “no tapering for now.”
Yields on 10-year Treasurys rose 46 basis points in May, including a jump of 16 basis points, or 0.16 percentage point, on May 28, as a report showing consumer confidence climbed to the highest in more than five years bolstered speculation the Fed would scale back its purchases. Gross’ Pimco Total Return Fund, the world’s largest mutual fund, declined 1.9 percent in May, the biggest monthly loss since September 2008.
The performance of the $293 billion Total Return Fund puts it behind 94 percent of similarly managed funds through May 30, according to data compiled by Bloomberg.
U.S. government debt tumbled 2 percent last month, the most since December 2009, according to Bank of America Merrill Lynch indexes. Employment gains and increases in housing and consumer confidence suggested the recovery in the U.S. economy, the world’s largest, is gaining momentum.
Global bond markets posted their biggest monthly losses in nine years in May. The Bank of America Merrill Lynch Global Broad Market Index, which tracks more than $40 trillion of bonds, fell 1.5 percent.
Gross raised the holdings of Treasurys in his flagship fund to 39 percent as of April 30, the highest level since July 2010, from 33 percent as of March 31. He’s increased the proportion of U.S. government securities every month this year since February. In 2011, Gross’ fund lost an estimated $5 billion to withdrawals, according to Morningstar Inc., after he eliminated U.S. Treasurys early in the year and missed a rally.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $2.04 trillion in assets as of March 31.
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