NEW YORK (Reuters) – Bill Gross, the closely watched bond investor, on Thursday said the Federal Reserve will begin to raise U.S. interest rates slowly this year to normalize distortions in the financial markets but that bonds and equities won’t be vulnerable to huge sell-offs.
Gross, who oversees the Janus Global Unconstrained Bond Fund, said Fed policymakers “seem to now appreciate the hole that they have dug by allowing interest rates to go too low for too long. Despite reasonable growth, some of them recognize the system’s distortion if only because inflation is going down, not up, in the process.”
Gross said the Fed now recognizes zero percent interest rates are moving money into the financial sector for arbitrage and profits but very little of that is going into the real economy for investment.
The Fed said on Wednesday the U.S. economy was expanding “at a solid pace” with strong job gains in a signal that the central bank remains on track with its plans to raise interest rates this year. But the central bank left the door open for a later move as policy makers hinted at wariness about low inflation, slow global growth, a stronger U.S. dollar and international market turbulence.
In his fifth investment outlook letter since joining Janus Capital Group Inc, Gross said the Fed will raise interest rates in late 2015 but “It won’t however, move quickly – capitalism has been damaged by the change in rules since 2008. Caution, therefore, will prevail in the U.S. and elsewhere for a long time.”
The Fed’s slow approach will support financial markets, Gross said. “Bonds despite their ridiculous yields will not easily be threatened with a new bear market,” he said. “Investors should expect as well, that because of the slow unwinding of zero percent rates in the U.S., that U.S. and global stocks will be supported. Their heyday is over however.”
Gross titled his latest Investment Outlook report ‘Games People Play’ and likened the global financial system to a game of Monopoly. “Investors and game players do not logically give money away- a mattress ultimately becomes a more attractive haven. And most importantly – because the markets and the financial sector are ultimately the servants of the real economy – growth is challenged and stunted.”
He said an investor must be cognizant of future low and, in some cases, negative total returns in 2015 and beyond. “Capitalism’s distortion, with its near term deflation, poses a small but not insignificant risk to what my mother warned was the final destination for all games – entertainment or real. ‘In the end,’ she said, ‘all of the tokens, all of the hotels, all of the properties – they all go back in the box.'”
(Reporting By Jennifer Ablan- Editing by Chizu Nomiyama)
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