In a recent note entitled ‘On the Wings of an Eagle’, Gross, managing director of the bond giant, said moving into higher risk assets or leveraging higher quality assets had been the only options left open to investors as a result of negative real interest rates.
But he felt that limitations were starting to show and said investors should be mindful of central bank policies as articifically priced markets began to – hopefully – unwind.
“This now near five-year migration across the global asset plains in search of taller grass and deeper water has had limits, both in price and real growth space.
“If monetary and fiscal policies cannot produce the real growth that markets are priced for, then investors at the margin – astute active investors like Pimco – will begin to prefer the comforts of a less risk-oriented migration,” he said.
Gross described a shallow ‘T-shaped’ investment future, which he likens to the outspread wings of an eagle, whereby the future of investment markets approached a “time-uncertain inflection point” where outcomes could swing either left or right depending on the outcomes of monetary policy in a highly geared world.
He said of the recent taper decision: “Admittedly the reaction in the bond market was rather sudden and it precipitated not only the disillusioning of bond holders, but also an increase in redemptions in retail mutual fund space. But then the Fed recognised the negative aspects of ‘financial conditions’, postponed the taper, and interest rates came back down,” he said.
“Our primary thrust has been to focus on what we are most confident about, that the Fed will hold policy rates stable until 2016 or beyond. While this and its conjoined policy of QE may have only redistributed wealth as opposed to creating it, it is a policy that a Janet Yellen Fed seems determined to pursue.”
While he said the taper would see QE eliminated at some point next year, the 25bps policy rate will continue until 6.5% unemployment and 2% inflation have been achieved, if so, he said Treasury, corporate and mortgage positions should provide low but defensive returns.
