Bill Gross Sees Higher Long-Term Yields Amid Reflation

Bill Gross has been/is still a huge proponent of bullishness for quite some time. Even though he was wrong a few times with his QE3 date predictions, his sentiment may reflect how the rest of the US traders think. If that is true, expect prices to unravel quickly should Bernanke and FOMC does not indicate any concrete plans for easing on Sept 13.

Long-term bond yields will be higher than short-term rates in the U.S. and Europe because of reflation, according to Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co.

Bond yield curves will be “very steep” for “a very long time,” Gross wrote in a Twitter post yesterday. A period of reflation is under way, he wrote. Investors should expect “higher long rates” and “low short rates,” according to Gross, who is based in Newport Beach, California.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., talks about European Central Bank President Mario Draghi’s bond-buying proposal, the U.S. economy and investment strategy. He speaks with Stephanie Ruhle, Adam Johnson and Alix Steel on Bloomberg Television’s “Lunch money.”

So-called yield curves are already steepening in the U.S. and Germany. The gap between 10- and 30-year U.S. rates widened to as much as 1.18 percentage points yesterday, the most since May. Thirty-year bonds, because of their long maturity, are more sensitive to inflation than shorter-term Treasuries.

The spread between 10- and 30- year German yields was 85 basis points yesterday. The difference was as wide as 91 basis points on July 24, the most since September 2011.

European Central Bank President Mario Draghi on Sept. 6 announced an unlimited bond-purchase program to gain control of interest rates in the euro region. Weaker-than-expected U.S. job growth in August has fueled bets the Federal Reserve will add more stimulus to the economy through bond purchases when it meets this week.
Fed Bets

The Fed will give “strong hints” or provide “positive action” at this week’s Federal Open Market Committee meeting, Gross said in a Sept. 7 radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. The central bank will likely ease further through “open-ended” purchases of Treasuries and mortgages and extend its pledge to keep interest rates low into 2015, he said.

Payrolls rose a less-than-projected 96,000 in August and the unemployment rate declined as more Americans left the labor force, indicating the employment market is stagnating. Fed Chairman Ben S. Bernanke said in an Aug. 31 speech in Jackson Hole, Wyoming, the central bank will provide more stimulus as needed to promote a stronger economic recovery.

The Fed has expanded its balance sheet with two rounds of quantitative easing, purchasing $2.3 trillion of assets between December 2008 and June 2011.

via Bloomberg

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