Gross, who serves as co-chief investment officer of Newport Beach, California-based Pimco, wrote last week in his monthly investment outlook that asset-price irrationality is rising after years of record low benchmark interest rates by the Fed.
Gross reduced his holdings of investment-grade credit securities in his flagship $286 billion Total Return Fund to 9% in January, from 10% in December, according to the latest available data on Pimco’s website. Treasuries are his largest holdings at 30%.
Bernanke also said during in Washington that the central bank may decide to hold bonds on its over $3 trillion balance sheet to maturity and refrain from selling if that is necessary to prevent disruptions in financial markets.
“The Fed will never, will never, sell their portfolio,” said Gross, who reiterated that Pimco is buying Treasury Inflation-Protected Securities, or TIPS, as a way to hedge against the risk that the Fed’s unprecedented monetary stimulus will eventually spark inflation. “The Fed will never sell any bonds.”
Gross has said rising central-bank tolerance of inflation means investors should hedge higher prices by buying TIPS.
A measure of inflation expectations followed by the Fed known as the five-year, five-year forward break-even rate is at 2.8%, up from a low over the last year of 2.37% reached a year ago. The gauge, which uses both inflation protected and nominal Treasuries, projects the expected pace of consumer price increases over a five year period beginning five years from now.
“We simply see, and I think other investors see, central banks on the move -- to call it a race to the bottom -- the same as printing checks -- doing it at a trillion a year,” said Gross, referring to quantitative easing by the Fed, Bank of Japan and the Bank of England.
“Central banks are trying to reflate and that means higher inflation,” Gross said. “It appears all central banks are well content with inflation moving up from 1.5% to 2% to perhaps 2.5% to 3%. A forward looking investor has to play it that way.”
The European Central Bank left its benchmark interest rate at 0.75%, already a record low, at its policy meeting yesterday. While policy makers lowered their economic forecasts, they maintained an outlook for a gradual recovery later this year, and ECB president Mario Draghi signaled that Europe’s economy will have to get worse before he’ll consider more stimulus.
Even with the forecast, Gross said the ECB may take additional action to bolster the economy within two weeks, which is likely to be focused on weakening the value of the euro relative to the U.S. dollar and other currencies.
The ECB has “got potential to do a QE themselves, although that’s far down the line,” Gross said. “But ultimately what they want to do is weaken their currency relative to the dollar and other currencies, so that they can become more competitive.”
The $288 billion Total Return Fund gained 7.2% over the past year, beating 92% of its peers, according to data compiled by Bloomberg.
Pimco, a unit of the Munich-based insurer Allianz SE, managed $2 trillion in assets as of Dec. 31.