One On One With Bill Gross, Founder of Pimco Total Return Fund
Thursday, March 30, 2006
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SUSIE GHARIB: As we just reported, bond prices tumbled today, pushing yields to their highest level in almost two years. Joining us now with more analysis of today`s bond sell off and the outlook, Bill Gross, founder and chief investment officer of Pimco Total Return Fund, the world`s biggest bond fund. Hi, Bill, how are you doing?
BILL GROSS, FOUNDER & CHIEF INVESTMENT STRATEGIST, PIMCO: Hi, it is nice to be here.
GHARIB: So as you know, the bonds sold off today on concerns, new concerns about rising inflation. In your view, are those concerns warranted?
GROSS: I don`t think so. I think despite the ambiguity in the recent Fed statement, that the Fed stops at 5 percent. I don`t think anything has changed. I think the economy ultimately slows down as housing slows down, inflation remains benign and the Fed is going to be well-justified in stopping at 5 percent. So I think the sell off was for other reasons.
GHARIB: Why are you so convinced that it is 5 percent and that that`s it, especially given today`s economic reports and other data that we`ve been seeing recently.
GROSS: It`s been a long cycle. They started at one and now they`re close to 5 and so 4 percent or 400 basis points as we call it is a long stretch in terms of a tightening cycle and also in terms of the length of the cycle, over 18 months, that`s historically long in terms of its duration. So those two factors should ultimately slow down this economy. To my way of thinking there`s no doubt and I think to Bernanke and the Fed, there is no question either. It is just a question of how much it slows down. I suspect by the second half of the year that housing will have slowed down this economy to 2 percent and that 5 percent is the cap.
GHARIB: So Bill, have you changed your investing strategy at all since the Fed meeting on Tuesday?
GROSS: No, we haven`t. Obviously, we have been cognizant of what`s happened in the past day or two. It hasn`t been pretty. But it has been due to other factors. To tell you the truth, we`re not watching the central bank here in the United States. We`re watching the central bank in Japan. The Bank of Japan holds the power now and holds the cards in terms of global interest rates and to the extent that they raise rates, not the Fed, then that will affect our markets.
GHARIB: And then what will you do differently if you see that happening?
GROSS: You know, if we saw the Bank of Japan moving aggressively to tighten interest rates and they have just begun their cycle, then that would automatically suggest that there is a competitive investment out there. That would mean that Japanese bonds are more competitive relative to U.S. bonds and cause some type of arbitrage selling. So we`re watching Tokyo just as intently as we`re watching Washington.
GHARIB: Now I understand that your investment column for this week, you had a special guest, Alan Greenspan. Is there anything that he told your group that you came away with some in sights, whether it was about inflation or interest rates?
GROSS: Sure, I think so. He didn`t comment on monetary policy. He wants to give Ben Bernanke a free rein there and I think that is certainly justified and admirable. What he did talk about was the potential at some point for a saturation level in terms of foreign holders of U.S. treasuries, I`m talking about central banks, I`m talking about other private participants. And while he didn`t know when that might occur or where that might occur in terms of a saturation level, he suggested that there is a point where foreign investors will have had enough and will begin to diminish their purchases of U.S. Treasuries. So, not a forecast from his standpoint, but certainly something to look out for in terms of that point where foreign central banks stop buying U.S. Treasuries.
GHARIB: So can we get some investment advice from you on what should investors who own bonds, what should they do at this point?
GROSS: Well, you know, short-term rates are attractive, 4 3/4 percent and perhaps soon to be 5. You know, the short end of the high quality curve at 5 percent plus is very attractive. And so while we wait out this uncertainty with the Bank of Japan, and with the participation rate and saturation level of foreign buyers as Greenspan has suggested, there is no pain in terms of a 5 percent short-term rate, so that is where I would park money.
GHARIB: Bill, thank you very much. We appreciate you coming on the program.
GROSS: You`re welcome. My pleasure.
GHARIB: My guest tonight, Bill Gross, chief investment officer of Pimco.
