PIMCO's Gross charges monetary policy represses Treasury yields
PIMCO managing director Bill Gross colored a recent report with references to Mark Twain, leaping frogs and dead frogs to highlight his belief that government policy focused on balancing Uncle Sam's books leaves bond investors on the stove to be cooked by inflation. Gross blames the Federal Reserve's overly expansionary monetary policies, including its Treasury bond-buying program, for artificially repressing yield, making bonds less desirable. He said "if the government is going to artificially repress yield, then focus on the parts of a bond that are less repressed." "Total returns for the first five months for almost all bond categories show positive price performance, which when combined with coupon interest income, produce portfolios 3% or so higher in value than at year-end 2010," writes Gross. "That number may not match stocks or some of the high-flying commodities, but its annualized total return of 6.5% to 7% beats inflation however you want to measure it – core, headline or median CPI." According to Bloomberg, the PIMCO Total Return Fund returned 8.3% in the past year — more than many comparable investment products. His advice comes as the government's $600 billion bond-buying program is a few weeks from ending, causing uncertainty about what will happen to interest rates when QE2 is no longer in effect. "Because the QEs cover an extraordinary period of monetary policy with a limited time frame, there is not enough data to indicate whether the end of QE2 will lead to higher or even lower rates, although higher is our strong preference," Gross said in his latest monthly note to clients. He said there is "overwhelming evidence" that existing Treasury yields "fail to adequately compensate investors for the risk of holding them," and who will buy them "remains a critical question to be answered." Gross, who controls the world's largest bond fund, said the financial repression caused by the state of bond investment leads to a transfer of wealth from savers to borrowers over the long term. "Investors shouldn't give their money away, and at the moment, the duration component of a bond portfolio comes close to doing just that — because it doesn’t yield enough relative to inflation," he said. Gross advises all frogs who are asleep in the pot to jump before the water hits a boiling point. "I harken back to Mark Twain and my second lesser-told frog story. There was this other frog who instead of being tossed into a pot of hot water was left to cool its heels in a pitcher of cold milk. Unable to jump out, he churned and churned those frog legs until eventually the milk turned into butter and the hardened butter allowed him the platform to leap to froggy freedom! Well, let’s get churnin’, fellow frogs," he said. "If the U.S. or the U.K. or any other government is going to attempt to boil us alive, let’s make butter! Butter in this instance is what PIMCO characterizes as cheap bonds," according to Gross. Write to Kerri Panchuk.