Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said the investment company may reduce its risk profile in 2013 after posting higher-than-average returns this year.
With interest rates so low and corporate spreads so tight, “you have to be leery of prices going the other way,” Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene. Newport Beach, California-based Pimco “might begin a shift toward something safer, and something more clean in terms of those dirty-shirt investments.”
Gross wrote in his monthly investment outlook released this week that structural headwinds may reduce real economic growth below 2 percent in the U.S. and other developed nations. With globalization, technological and demographic changes restricting growth, investors should seek returns from commodities such as oil and gas, U.S. inflation-protected bonds, high-quality municipal debt and non-dollar emerging market stocks, Gross said, reiterating earlier recommendations.
Gross, who serves as co-chief investment officer with Chief Executive Officer Mohamed El-Erian, said Pimco’s investment committee will meet today to discuss the outlook for 2013.
Long maturity developed country bonds in the U.S., U.K. and Germany should be avoided, as well as high-yield debt and financial stocks of banks and insurance companies, Gross wrote.
Investors should anticipate annual returns of 3 percent to 4 percent from bonds at best and equity returns only a few percentage points higher, Gross wrote.
Shorter-maturity Treasuries look appealing given that the Federal Reserve likely ends debt sales of the securities when its Maturity Extension Program finishes in December and with some bank accounts losing government insurance, Gross said.
“There is an appeal strangely enough in the short-term area,” Gross said. “Twist is probably going to be off, so the sale of two- and three-year Treasuries will stop. There is a lot of money on deposit with banks that has been guaranteed. That money basically is not going to be guaranteed anymore. There are hundreds of billions of dollars that may come back into the short-term Treasury market.”
There is about $1.4 trillion in cash sitting in non- interest bearing transactions accounts with balances above $250,000 that is set to lose in January temporary insurance coverage put in place in 2008. The unlimited insurance was part of the Transaction Account Guarantee program, or TAG, implemented by the Federal Deposit Insurance Corp. in 2008 and extended by the Dodd-Frank Act in 2010 as a way to shore up banks during the financial crisis.
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.