Bill Gross says the Federal Reserve should sell longer-term Treasuries and buy shorter-term notes to remedy the economy.
Longer-term debt usually carries higher interest rates than short-term loans, but the difference has flattened as central bankers keep rates low to stimulate growth. The Federal Reserve in 2012 initiated “Operation Twist,” purchasing 10-year Treasuries as a tool to revive U.S. growth and reduce the unemployment rate, a move that Gross asserts failed to build a strong economic foundation.
“I propose an ‘Operation Switch,’” Gross wrote in an investment outlook Tuesday for Denver-based Janus Capital Group Inc. “Instead of 2012’s ‘Operation Twist,’ which sold 2-5 year notes and reinvested the proceeds in longer-dated Treasuries now resting in their portfolio, the Fed should do just the reverse.”
Gross, whose Janus Global Unconstrained Bond Fund lost 2 percent in the past year, has been urging central bankers to end the low-interest-rate policies that are creating asset bubbles while failing to spur growth in the real economy. In his monthly letter in September, he said the Fed should “Get off zero now!” and risk trading some near-term market losses for longer-term stability.
“Capitalism does not function well, and profit growth is stunted if short-term and long-term yields near the zero bound are low and the yield curve inappropriately flat,” Gross said in Tuesday’s note.
He said the Fed holds more than $2 trillion in longer-dated Treasuries and mortgage securities that can be switched into two- to five-year paper, benefiting savers and liability-based businesses. He said central bankers will be too stubborn to follow his prescription, so anemic growth is likely to persist.
The odds of the Fed raising interest rates in December climbed to 50 percent as of Monday, according to data compiled by Bloomberg, after Fed Chair Janet Yellen and policy makers signaled last week that they’re prepared to take action as soon as their next meeting.
Gross, who was ousted from Pacific Management Investment Co. last year after leading the Pimco Total Return Fund to become the world’s largest mutual fund, has trailed 63 percent of similar unconstrained funds since he took over. George Soros, the legendary hedge fund investor, withdrew $490 million in the third quarter from a special Janus account that Gross ran.