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Bill Gross, US Fed Policy Means Treasury Issues ‘Free’ Debt

PIMCO’s Bill Gross, manager of the world’s biggest bond fund, said the US Federal Reserve’s latest round of monetary stimulus will enable the Treasury department to issue debt at no cost.

The central bank said Wednesday it will buy $45-B a month of US Treasury securities starting in January, expanding its asset-purchase program, and for the 1st time linked the outlook for its main interest rate to unemployment and inflation targets. The purchases will add to the $40-B a month it is buying of mortgage debt.

“What really happens, and this is critically important, is that the Treasury issues bonds and the Fed buys them and then it remits interest to the Treasury,” Mr. Gross, who runs the $285-B Total Return Fund, said in an TV interview Friday. “It means the Treasury is issuing debt for free. There are complications. Inflation is one of the complications.”

US Treasurys fell Wednesday after the Fed announced bond-buying plans as traders bet the actions would eventually fuel inflation. Thirty-year Treasury yields reached a 5-wk high of 2.93% Friay while break-even rates on 30-yr inflation-index bonds, a measure of expectations for consumer prices during the life of the securities, climbed to 2.55% Thursday, the most since 5 October.

Inflation to date has been held in check and “we are well below 2% and the Fed is comforted by that,” Mr. Gross said. “But ultimately, if you write checks for free and if it’s costless to finance a fiscal policy that is well into a deficit figure, yes, that is an inflationary moment to the extent that the private sector gets some animal spirits and takes that bait.”

Pimco’s Total Return Fund gained 11.2% during the past year, beating 94% of its peers, according to data compiled. The fund has returned 8.5% during 5 yrs, outperforming 97% of its competition.

US Treasury Yields Fall on Inflation Concerns

US Treasury prices extended gains Friday, pushing yields lower, after a report showed a decreased risk of US inflation.

Yields on 10-yr notes, which move inversely to prices, fell 3 bps to 1.70%, 1 basis point is 1 one- hundredth of a percentage point.

Yields on 30-yr bonds , the most sensitive to inflation worries, fell 4 bps to 2.87%.

Five-yr yields slipped 1 bps to 0.69%.

Treasury prices extended gains slightly after a report showed US consumer prices fell 0.3% in November. Excluding food and energy, prices rose 0.1%, less than expectations.

The report supports the Federal Reserve’s decision earlier this week to extend its bond-purchase programs to ease monetary policy in an attempt to boost economic growth. They said they’d be comfortable with inflation rising towards 2.5%.

With favorable Y-Y comparisons and very subdued wage pressures, “we expect core inflation to remain comfortably below the 2.5% Y-Y threshold that the Fed sees as the trigger point” for ending its asset-buying programs.

The US Fed tends to use as its inflation measure the annual change in the price index for personal consumption expenditures, or PCE. The index has increased over the last several months to 1.7% in the year through October, the most recent data available.

In the Fed’s projects release after Wednesday’s meeting, the range of PCE levels forecast by official tops out at 2.2% .

But, market-based measures of inflation expectations are higher, though still under the Fed’s new level.

Inflation expectations have risen this month, but off peaks hit a few months back.

The DB Market-Implied US Inflation Rate Index shows the inflation rate anticipated by investors in several maturities of Treasury Inflation Protected Securities, or TIPS, is 2.36%.

That’s actually down slightly from 2.38% the day before the Fed meeting, and 2.58% 3 months ago which was the highest since early Y 2011.

The range and the F-Cliff: as for a shorter-term horizon, strategists said yield level have reached a point that has brought buyers back into the market expected to stay in a relatively tight range for some time to come.

Ten-yr yields touched 1.75% during the Asian session, which may limit the decline by drawing in buyers.

On the week, 10-yr yields are still up from 1.63%. Thirty-year bond yields have increased from 2.81% a week ago and 5-yr yields are up from 0.62%. It is the 2nd weekly increase in yields for the securities.

Also, bond traders are watching for any trickle of signs from Washington whether lawmakers are closer to compromising on a deal to avert the F-Cliff: a package of expiring tax breaks and spending measures that threatens to drive the US economy back into a recession.

The country’s downgrade from S&P last year boosted safe-haven shifts into US Treasury bonds.