Pimco's Gross: Low interest rates may persist for decades

Reuters

By Sam Forgione

NEW YORK, Oct 2 (Reuters) - Bill Gross, manager of The PimcoTotal Return Fund, said on Wednesday that the global economy maybe facing low policy rates for decades.

Gross wrote in his October investment outlook that investorsshould "bet against" expectations that the federal funds rate -the U.S. Federal Reserve's benchmark short-term borrowing rate -will rise by one percentage point by late 2015.

"The U.S. (and global economy) may have to get used tofinancially repressive - and therefore low policy rates - fordecades to come," wrote Gross, a co-founder and co-chiefinvestment officer at Pimco, whose flagship Pimco Total ReturnFund has roughly $250 billion in assets.

"Right now the market (and the Fed forecasts) expects fedfunds to be 1 percent higher by late 2015 and 1 percent higherstill by December 2016. Bet against that," he wrote in theletter entitled "Survival of the Fittest?"

Gross's outlook on the level of rates is important becausePimco manages roughly $1.97 trillion and is one of the world'slargest bond managers. Gross and co-Chief Investment Officer andChief Executive Mohamed El-Erian's views on Fed actions andglobal credit also influence other investors because of thefirm's size in the marketplace.

The Fed has held its overnight funds rate between zero and0.25 percent since December 2008 and has more than tripled itsbalance sheet to around $3.7 trillion in an effort to pull theU.S. economy out of recession and spur stronger economic growth.

On Sept. 18, the Fed reiterated that it would not start toraise interest rates at least until unemployment falls to 6.5percent, as long as inflation does not threaten to go above 2.5percent. The U.S. jobless rate in August was 7.3 percent.

Most policymakers, 12 out of 17, projected the first ratehike would not come until 2015, even though the forecastssuggested they would likely hit their threshold for consideringa rate rise as early as next year.

The Fed also surprised investors by keeping its $85 billionin monthly purchases of Treasuries and agency mortgagesunchanged, confounding many who had expected a reduction.

The yield on the benchmark 10-year U.S. Treasury noteplunged 17 basis points to 2.69 percent following the Feddecision. Bond yields move inversely to their prices. The yieldon the benchmark 10-year U.S. Treasury note is currently 2.6percent.

Gross also said in the letter that a portfolio of Treasuryinflation-protected securities (TIPS) and shorter-dated bondscould return 4 percent in future years.

Gross's Pimco Total Return Fund gained 1.8 percent inSeptember, its best monthly performance since Jan. 2012,according to data from Morningstar. That performance beat 98percent of peers, the investment research firm said.

The fund is still down 1.97 percent for the year, accordingto the Pimco website. The Newport Beach, California-basedPacific Investment Management Co. is a unit of Europeanfinancial services company Allianz SE.

Gross's fund had outflows of $5.4 billion in September,marking the fifth straight month of outflows from the fund,Morningstar data showed on Wednesday. While the withdrawals weresizeable, they were the lowest since May.

Investors also pulled $220.3 million from the Pimco TotalReturn ETF in September. That also marked the fifthstraight month of outflows from the actively managed ETF, whichis designed to mimic the strategy of the flagship bond fund.

The withdrawals from the roughly $3.9-billion ETF camedespite its gain of 1.7 percent in September, which made it thetop performer among its peers, Morningstar data showed.

As a firm, Pimco had outflows of $6.5 billion across itsU.S. open-end mutual funds last month, marking the fourthstraight month of outflows from the funds, according toMorningstar. The outflows marked an improvement from withdrawalsof $11 billion in August.

Gross told CNBC television on Wednesday that there isvirtually no chance the U.S. government will default on its debtby Oct. 17. U.S. Treasury Secretary Jack Lew has warned Congressthe United States would exhaust its borrowing capacity no laterthan that date.

"The possibility of default on the part of the U.S. Treasuryis a million to one, and perhaps even in the billions," Grosssaid. He said the U.S. Treasury collects about $300 billion inmonthly revenues while paying out about $40-45 billion inmonthly interest.

"There's no possibility that the U.S. Treasury would everthink of and would ever be in a position of defaulting, basedupon that coverage," Gross said.

A resolution to the looming fight between Democratic andRepublican lawmakers over raising the $16.7 trillion federaldebt ceiling is expected to be reached on Oct. 17. A failure toincrease the borrowing limit could cause the government todefault on its debt, analysts have said.

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