Gross Says Fed Won’t Tighten Till 2016

PIMCO manager Bill Gross has taken to Twitter to hammer home the idea that there’s value in bonds as the Fed continues to support markets with quantitative easing and bond buying.

The bond king’s Monday morning tweet was, initially, simple and direct: “One big idea—policy rates cannot normalize.” The manager fleshed out the tweet with “policy implications: curves remain steep, bullets beat barbells.”

 

GROSS: One Big Idea – policy rates cannot normalize. Portfolio implications: curves remain steep, bullets beat barbells.

 

While his Twitter followers asked for clarification (“could you explain the bullet strategy?” one tweet asked), an earlier Gross tweet on Sunday left little doubt the portfolio manager was long on bonds.

Gross: So bonds come out of their coffin & it’s not even Halloween. #Bernanke says follow policy rate & we agree. 2016 tightening @ earliest

Gross’s current tweets expand and amplify his latest long-form investment outlook, where — in his July letter to investors — he stated that bonds were oversold in response to Fed Chairman Ben Bernanke’s May comments about “tapering,” or reducing the Fed’s commitment to buying U.S. Treasuries and mortgage-backed securities.

In that outlook three weeks ago, Gross argued that the Fed was committed to a 25-basis-point federal funds rate to last beyond the end of its bond-buying program.

“If frontend curves are up to 50 basis points cheap, then intermediate curves — the 10-year Treasury — may be as much as 35 basis points too cheap," Gross wrote. "They belong in our opinion at 2.20% instead of 2.55%.”

Given the 10-year bond’s current 2.49% yield, the Gross investment thesis means bond prices have plenty of room to run up.

While Gross’ Monday tweet and July outlook focus on policy rates, market concern over “tapering” may also be yielding to diminished fear over the impact of reduced Federal Reserve bond buying.

Fed Chairman Ben Bernanke has walked back his tapering comments on a number of occasions, most recently in Senate testimony Thursday where he said that monetary authorities would be closely watching data on economic performance to determine timing issues.

An article in Monday’s Wall Street Journal notes that surveyed economists are now more pessimistic — amid disappointing corporate earnings and GDP growth — than when Bernanke announced the Fed’s intentions to gradually withdraw its support for Treasuries.

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Check out Are TIPS From Bill Gross Worth Much Anymore? on ThinkAdvisor.