The yield on the two-year Treasury note was 0.246 percent, up from 0.239 percent at the end of last year. The yield on the three-year note was 0.321 percent.
“ There is limited price advantage there if a three-year Treasury goes from 30 to 20 basis points, it’s about a quarter of a point,” said Gross. “But we like that.”
Strategists from Morgan Stanley to Bank of America Corp. to Barclays Plc expect some of the money on deposit that will lose government insurance will flow into the U.S. money markets, sending rates possibly as low as below zero on some short-term debt instruments like Treasury bills.
The Fed lowered its benchmark interest rate to a range of zero to 0.25 percent in December 2008 and has said economic conditions will probably warrant holding it at record lows through mid-2015. The central bank is buying $40 billion in mortgage debt each month in its third round of quantitative easing aimed at keeping longer-term borrowing rates low to buoy economic growth.
Fed policy makers, who meet Dec. 11-12, may announce more monetary accommodation as Operation Twist, as the Maturity Extension Program is known. A “number” of Fed officials said at their policy meeting in October that additional monthly purchases of bonds may be warranted next year, according to the minutes of the Federal Open Market Committee. Operation Twist will end this month.
The Fed “easing is going to continue,” El-Erian said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “We will see more balance sheet operations, and maybe even see a tweak to the communications. The Fed will remain hyper active.”
Gross, the founder of Pimco, raised the proportion of U.S. government and Treasury debt in his flagship $285 billion Total Return Fund to 24 percent of assets in October, the first increase since April, as investors speculated the Federal Reserve would add to stimulus measures through more asset purchases, according to the latest available company data. Mortgages remained the fund’s largest holding at 47 percent.
The Total Return Fund gained 11.7 percent over the past year, beating 94 percent of its peers, according to data compiled by Bloomberg. The fund has returned 8.5 percent over five years, outperforming 97 percent of competitors.