(Bloomberg News) Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., said investors may be at a disadvantage for as long as 15 years as the U.S. keeps borrowing rates low to reduce its debt burden.
"Savers are being disadvantaged" when compared with debtors, Gross said during an interview on Bloomberg Television's "Surveillance Midday" with Tom Keene. "What policy makers are trying to do is rebalance this imbalance, in terms of too much debt and too attractive rates on savings. It's basically called financial repression. We call it pocket picking."
Bond holders are being hurt by low policy rates -- a Federal Reserve funds rate at zero to 0.25 percent in the U.S. -- and the increasingly negative real yields they cause as inflation accelerates, which erodes the value of fixed-payments for savers, according to Gross. This is taking place as the government reaps the gains of low rates, which reduce the cost of servicing its debt.
The difference between the yields on Treasury 10-year notes and the rate of inflation, known as the real yield, turned negative this month for the first time since the end of 2008, when Fed policy makers cut interest rates to a record low and embarked on a series of policy measures that peaked with its program of bond buying that has been dubbed quantitative easing, or QE.
This year's federal budget deficit is projected to reach $1.5 trillion, or 9.8 percent of gross domestic product, according to the Congressional Budget Office.
Pimco's $240.7 billion Total Return Fund had minus 4 percent of its assets in government-related debt last month. It can have a so-called negative position by using derivatives, futures or by shorting. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.
Gross, 67, said investors should seek alternatives to U.S. bonds, including developing or emerging-market debt at higher yields denominated in non-dollar currencies. Canadian and German government debt, as well as U.S. corporate securities, are attractive alternatives, Gross reiterated today.
Earlier this month, Gross said that the firm has a short position in short-term LIBOR bank-related swaps, one component of the government related category that also comprises agency bonds, interest-rate swaps, Treasury Inflation Protected Securities, or TIPS, Treasury futures and options and corporate securities guaranteed by the Federal Deposit Insurance Corp.
Total Return Fund