Fixed Income

Obama speech recognizes hurdles for first time: Pimco’s El-Erian

Pacific Investment Management Co.'s Mohamed El-Erian said President Barack Obama is moving for the first time to “get ahead” of U.S. economic challenges because the Federal Reserve is unable to revive employment on its own.

Pacific Investment Management Co.’s Mohamed El-Erian said President Barack Obama is moving for the first time to “get ahead” of U.S. economic challenges because the Federal Reserve is unable to revive employment on its own.

Obama called on Congress yesterday to pass a jobs plan that would inject $447 billion into the economy through infrastructure spending, subsidies to local governments to stem teacher layoffs and cutting in half the payroll taxes paid by workers and small-business owners. Tax cuts account for more than half the dollar value of the stimulus.

“For the first time, the administration recognizes how deep our economic challenges are and is trying to get ahead of them,” said El-Erian, chief executive and co-chief investment officer of the world’s biggest manager of bond funds. “My hope is that there’s enough there for both parties so that they can coalesce to the center.”

The president, speaking before a joint session of Congress, demanded six times that lawmakers act “right away” to pass his program. Job growth stalled last month and the unemployment rate has hovered near 9% for more than two years.

“If Washington doesn’t come together, we’re not only going to face years of low growth, we’ll end up in recession, and it’s going to be very costly,” Newport Beach, Calif.-based El-Erian said.

Fed Action Likely

El-Erian reiterated Pimco’s view that Federal Reserve Chairman Ben S. Bernanke will be inclined to take additional steps to spur growth beyond the two previous rounds of debt buying, known as quantitative easing. The central bank will likely extend the maturities of its portfolio while shedding shorter-maturity debt, he said. The tactic has been called “Operation Twist” after a similar program in the 1960s.

“I suspect we will see something from the Fed,” El-Erian said. “Ultimately, it’s not going to be effective at generating growth and it’s not going to be effective in reducing unemployment. For that, you need the other agencies in Washington to get their act together.”

Treasury 10-year note yields were below 2% as speculation that Europe’s sovereign-debt crisis may cripple its financial institutions fueled demand for refuge.

U.S. 10-year yields declined two basis points, or 0.02 percentage points, to 1.96% in New York, according to Bloomberg Bond Trader prices. They reached a record low 1.9066% on Sept. 6. The 2.125% securities maturing in August 2021 increased 5/32 today, or $1.56 per $1,000 face amount, to 101 15/32.

‘Moment of Truth’

The benchmark securities headed for a second weekly gain after two euro-area officials said the European Central Bank plans to dilute a proposal to wean distressed banks off its emergency funding on concern it would exacerbate the region’s debt crisis.

“We need Europe to have its moment of truth, to recognize that the current course isn’t sustainable,” El-Erian said. “They need to opt for one of two options: either full fiscal union, or a smaller, stronger euro zone.”

–Bloomberg News–