Pimco’s Gross: Fed won’t raise rates for at least two years

Pacific Investment Management Co.'s Bill Gross said the Federal Reserve is unlikely to raise interest rates for two to three years as it seeks to keep the economy from slipping back into recession.

Pacific Investment Management Co.’s Bill Gross said the Federal Reserve is unlikely to raise interest rates for two to three years as it seeks to keep the economy from slipping back into recession.

Treasury two-year note yields dropped below 0.50 percent for the first time today after the Labor Department said the economy lost more jobs in July than economists forecast. The difference in yields between 2- and 10-year notes is 2.34 percentage points, more than double the average of 1.11 percent for the so-called yield curve over the past 20 years.

“When you analyze that portion of the curve, it says the Fed is on hold for a long, long time,” Gross said today during a radio interview on “Bloomberg Surveillance” with Tom Keene. “When you get down to 50 basis points on two-years, that’s giving you a signal that there’s not much left on the table.”

Gross, manager of the world’s biggest bond fund, has been benefitting from the steep yield curve by buying five-year Treasuries, holding them for a year before selling to pick up capital appreciation as well as interest income. His $239 billion Total Return Fund has returned 13 percent in the past 12 months, beating 71 percent of its peers, Bloomberg data show.

“Hopefully as long as the curve stays steep and as long as the Fed stays where it is, then you produce two- to two-and-a- half returns as opposed to 50 basis points,” Gross said.

The Fed has maintained a range of zero to 0.25 percent for its benchmark rate for overnight loans between since December 2008 to encourage the economic recovery. Policy makers meet next week on Aug. 10.

The two-year note yield fell two basis points to 0.51 percent after falling to 0.4977 percent, the lowest level since the Treasury began regular sales of the securities in 1975. The 10-year note yield touched 2.8398 percent, the lowest level since April 2009.

Companies in the U.S. added workers in July for a seventh straight month at a pace that suggests the labor-market recovery will be slow to take hold.

Private payrolls that exclude government agencies rose by 71,000, less than forecast, after a gain of 31,000 in June that was smaller than previously reported, Labor Department figures in Washington showed today. Economists projected a 90,000 rise in private jobs, according to the median estimate in a Bloomberg News survey. Overall employment fell 131,000 and the jobless rate held at 9.5 percent.

The U.S. faces long term structural unemployment near 7 percent, Gross said.

“The jobs that were will not be coming back and the unemployment rate of 4.5 percent is really a fiction of the levered era,” Gross said.