Pimco’s Gross Favors ‘Strong’ Company Bonds, Stocks

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors should favor debt and stocks of “strong” companies, and assets in emerging markets with improving economic growth.

Investors in riskier assets will get “haircuts” because U.S. economic growth will be closer to 3 percent than the range of 5 percent to 7 percent for the past 15 years, Gross said. The U.S. economy will begin to recover in the second half of 2009, he wrote in his August investment outlook on Pimco’s Web site.

U.S. corporate bonds are outperforming Treasuries in 2009, the first time in three years, as signs of improvement in the economy led investors to seek higher-yielding assets. Franklin Templeton Investments, a mutual fund company that oversees $450 billion, and JPMorgan Chase & Co., the second-largest U.S. bank, are also recommending company bonds.

“There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields,” Gross wrote. “A journey to 3 percent nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end.”

Gross also favors emerging markets where growth prospects are “tilted upward,” according to the report.

‘Tangible Earnings’

“Stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope,” Gross wrote. High-risk bonds, commercial real estate and lower-quality municipal bonds “may suffer,” the report said.

Federal Reserve Chairman Ben S. Bernanke used the term “green shoots” in an interview aired March 15 on CBS Corp.’s “60 Minutes” to describe signs of improvement in the economy.

U.S. corporate bonds rated A to AAA by Standard & Poor’s returned 7.3 percent this year, according to indexes compiled by Merrill Lynch & Co. The U.S. Treasury Master Index handed investors a 4.9 percent loss, according to Merrill. MSCI’s World Index of stocks has returned 13 percent so far in 2009.

The Templeton Global Bond Fund is avoiding debt issued by the U.S., the U.K., and Germany and has sold Japanese yen it purchased last year, said John Beck, the company’s co-director of international bonds.

‘Bullish View’

Templeton is favoring U.S. bank debt and municipal bonds, Beck, who is based in London, told reporters on July 27 during a trip to Singapore. The company, which is in San Mateo, California, is also investing in a mix of local-currency and dollar-denominated securities in emerging markets, he said.

JPMorgan has a “bullish view” on high-grade corporate bonds, it said in a report July 24.

“Money continues to be allocated to the high-grade bond asset class,” said the report by JPMorgan analysts including Eric Beinstein, co-head of U.S. credit strategy, in New York.

For the week ended July 22, high-grade bond funds drew $1.4 billion, above the 13-week average of $1 billion, the report said.

The Federal Reserve said yesterday that most of its 12 regional banks detected a slower pace of economic decline in June and July, further signs the worst U.S. downturn in at least five decades is closer to an end.

U.S. Contraction

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.52 trillion of writedowns and credit losses at banks and other institutions and sent the global economy into its first recession since World War II.

The U.S. economy shrank 1.5 percent in the second quarter according to the median forecast in a Bloomberg News survey of economists before the Commerce Department reports the figure tomorrow. The first-quarter contraction was 5.5 percent.

Gross’ $161 billion Total Return Fund returned 10.9 percent in the past year, beating 96 percent of its peers, according to data compiled by Bloomberg. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

Pimco’s Gross Reduces Mortgage Holdings, Adds to Cash Position

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of mortgage debt last month and trimmed his bet against cash and equivalent securities.

Gross cut the $161 billion Total Return Fund’s investment in mortgage bonds to 54 percent of assets, the least in almost two years, from 61 percent in May, according to Pimco’s Web site. Cash comprised negative 6 percent, the most in 2009, rising from negative 14 percent.

Pimco’s founder and co-chief investment officer has advised investors to favor bonds and dividend-paying equities, in his investment outlook for this month published July 1. Economic growth will be slower, profit margins will be narrower and asset returns will be smaller than in the past decade because of the U.S. recession, he wrote.

Gross trimmed holdings of government bonds to 24 percent of assets, the least since February, from 25 percent. The category can include Treasuries, inflation-linked Treasuries, so-called agency debt, interest-rate derivatives and bank debt backed by the Federal Deposit Insurance Corporation. He kept his allocation to investment-grade corporate bonds unchanged at 18 percent.

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.51 trillion of writedowns and credit losses at banks and sent the global economy into its first recession since World War II.

The Total Return Fund returned 10.9 percent in the past year, beating 96 percent of its peers, according to data compiled by Bloomberg. The one-month return is 1.2 percent, outpacing 45 percent of its competitors. The company, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

Pimco Says Avoiding Japanese Bonds Is a ‘Huge Risk’

July 10 (Bloomberg) — Pacific Investment Management Co., which runs the world’s largest bond fund, said investors who avoid Japanese government debt may miss out on a rally.

Japan’s benchmark bonds may gain this year, pushing 10-year yields to the lowest since August 2003, as the world’s second- largest economy struggles to emerge from its worst postwar recession and avoid a deflationary spiral, saidTomoya Masanao, a Pimco executive vice president in Tokyo. The Newport Beach, California-based company manages $756 billion in assets.

“There is a huge risk not holding bonds,” Masanao said in an interview with Bloomberg News on July 8. “The growth rate won’t rise much and inflation will remain low.”

Japanese government bonds are poised to outperform Treasuries this year for the first time in a decade, according to indexes compiled by Merrill Lynch & Co. International purchases of U.S. financial assets grew more slowly in April as China, Japan and Russia pared demand for Treasuries, the U.S. government said last month.

Pimco’s Foreign Bond Fund Unhedged, which includes Japanese debt, returned 5.7 percent in the past month, beating 97 percent of its competitors, data compiled by Bloomberg show. Its $157 billion Total Return Fund, which doesn’t have Japanese bonds, handed investors a 2.8 percent return during the period.

Treasuries lost 4.5 percent in the first half, the worst performance in 30 years, Merrill indexes show.

Yield Curve

Japan’s economy is likely to contract 6 percent in the fiscal year that started April 1, the International Monetary Fund said this week. Economists in a Bloomberg News survey said Japan’s quarterly growth rate will remain below 3 percent through the three months ending June 30, 2010. Consumer prices, excluding fresh food, slid a record 1.1 percent in May from a year earlier, the statistics bureau said last month.

Prime Minister Taro Aso has pledged to spend 25 trillion yen ($269 billion) on stimulus measures since taking office in September, adding to a public debt burden that is the largest in the industrialized world. Japan’s national debt will surge to 197 percent of gross domestic product in 2010, according to the Organization for Economic Cooperation and Development.

The increase in borrowing won’t boost long-term yields before 2011, according to Pimco’s Masanao.

“In the next three- to five-year horizon, the longer-end of the yield curve will be under steepening pressure as fiscal deficit concerns increase,” Masanao said.

A yield curve is a chart that plots the yields of bonds of the same quality, but different maturities. It steepens when yields on shorter-maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.

Inflation Bonds

Pimco’s Masanao also said Japan’s inflation-linked securities “present a good investment.”

Inflation linked-debt with a 1.1 percent coupon due June 2014 yield 2.25 percent, higher than the 0.66 percent rate on conventional notes. Inflation-adjusted securities typically yield less than regular bonds because their principal payment increases at the same rate as inflation.

Japan’s 10-year bond yields were unchanged at 1.295 percent as of 3:34 p.m. in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The yield has fallen two basis points, or 0.02 percentage point, this week.

The yield may decline to as low as 1 percent this year, Masanao said.