PIMCO’s Bill Gross joined Bloomberg Television’s Erik Schatzker and Sara
Eisen on “Market Makers” today and said: There is an 80 percent
probability that the central bank will begin tapering its bond-buying
program in September. He went on to say, that the Fed will rely on
forward guidance rather than asset purchases more going forward.
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On seeing the market as “a war in which there will be many causalities”:
“It is bloody if in fact the market has turned and interest rates
have moved higher. They’ve done that for the past three months and bond
prices have gone down. We know that bond mutual funds in the market
itself is described in higher-quality terms and has slipped by about 2
percent. Investors are worried and I’m suggesting there’s a war on to
retain assets and fight a future battle in which the return on bonds may
be less than historic. We’ve come up with some strategies that aren’t
necessarily durational or maturity related and can protect principle
more than historic.”
On whether September is the time for tapering:
“I think it is changing and I think September is probably the time.
We give it 80-percent and here’s the reason. We think the future fed
policy will increasingly rely on what’s being called forward guidance as
opposed to asset purchases or quantitative easing. To the Fed’s way of
thinking, that is a tired horse which has inflated asset prices but has
done little to stimulate growth. In addition, according to some Fed
numbers, it puts the Fed balance sheet at future risk with potential
higher interest rates. This implies to us our reliance on future
guidance and forward guidance which is a reverse type of twist from back
in September of 2011. This is a reverse twist in which the fed wants
the market to buy securities with the comfort of forward guidance and
withdrawing the purchasing of 85% of the gross issuance of 20 year and
30 year treasuries. If this diagnosis is correct, long treasuries and
long maturities should be sold in one to five years and one to ten year
maturities should be brought.
On how certain he is about the direction of the bond market:
“The way we look at it is a conceptual way, not subject to historical
modeling. In a highly levered economy, and we have a highly levered
economy not just in the U.S. but globally, when there is a lot of
leverage in the economy, the central bank must tread lightly in terms of
increasing interest rates. That’s why you see the emphasis on forward
guidance and that’s why we see quantitative easing. The store raising
interest rates to countermand higher inflationary threats basically a
thing of the past. If the Fed stays where they are, at 25 basis points
for a long time, perhaps 2016 and beyond, what does it mean in terms of
strategy? It means that the five year and ten year don’t represent value
relative to inflation but represent value relative to where they were
three or four months ago at 150 to 160. It all depends on what the Fed
does in a central bank does and leverage and the associated increase
which would slow the economy significantly and we think the Fed
understands that.”
On whether inflation is something to be concerned about:
“Ben Bernanke has emphasized this. He says they will defend inflation
not from the top side but from the downside. The consumption deflator,
so to speak, that is at 1.2% and they are targeting as high at 2.5%.
This will argue for aggressively easy fed policy going forward, keeping
funds low to elevate inflation much like the Japanese are trying to do
in their economy.”
On whether he has reversed the war to retain assets in the fixed income market:
“It sure is working. Our returns relative to the market were not only
positive in terms of their real returns. What the strategy is, is to
emphasize durational, longer maturities less. The problem is you reduce
yields. If you went to cash entirely, you would have a portfolio
yielding 10 basis points and clients wouldn’t want that grade you want
to reduce aeration but substitute other areas in the bond market which
provide what we call ‘carry.’ That emphasizes yield but is less
sensitive area we are talking about yield curve emphasis volatility and
bonds and other currencies as opposed to dollar-related currencies.
There are other ways to defeat this army other than emphasizing
duration, and we intend to move into other areas to do it.”
On whether it is time for PIMCO to get back into Europe:
“Perhaps not. Not in the core countries like Germany. Yields are
historically low, lower than even the United States. If Europe is
improving, you would not look for ECB to begin tightening. They just
gave us our guide’s in terms of easing for an indefinite time area their
yields are significantly lower in terms of the core. In terms of the
UK, they have adopted forward guidance which suggests, although
indefinite in terms of a lag and unemployment, their policy is as easy
as the policy in the United States. I would look at German Bonds.”
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