UPDATE 2-Pimco's Gross says firm will win 'war' on bonds
NEW YORK, Aug 8 (Reuters) - Bill Gross, the founder of Pimco who is often known as the "bond king," on Thursday said that Pimco would overcome the bond market selloff that began in May as he urged investors not to flee the fixed-income market.
Gross, who runs the firm's flagship Pimco Total Return Fund, the world's largest mutual fund, in his August investment outlook again told investors not switch out of bonds, despite their "defeat in the past few months."
The Total Return Fund, which according to Morningstar has about $262 billion of assets, has taken a battering since May, with investors pulling out $18.4 billion. Pimco has reported the fund is down 2.32 percent this year.
"Stick with PIMCO, we're going to win this new war!" said Gross, a founder and co-chief investment officer at Pimco.
Bond yields, which move inversely to the prices on bonds, spiked higher in May and June on expectations that the Federal Reserve will begin to reduce its bond purchases, a move likely to drive up interest rates. The Fed is buying $85 billion in Treasuries and agency mortgages monthly in an effort to spur the economy.
Gross said that Pimco will be able to maximize the yield on bond investments through various strategies, but said that investing in longer-dated bonds, or maturity extension, is becoming less viable in the current near-zero interest-rate environment.
The effective duration of the Pimco Total Return Fund was 5.82 years as of June 30, Pimco's website said.
He said taking advantage of credit spread, volatility, the yield curve, and currency risk were preferable to achieve "carry" in future years. Gross called "carry" a broad term for yield, but said it reflects more than the interest rate on a bond.
"When interest rates go up as fast as they did in early May, prices go down for long and intermediate maturity bonds, and the carry associated with maturity extension becomes akin to a horse charging a machine gun," Gross said in the outlook.
Gross said bond yields are likely to rise more gradually over the next few years than they did in May and June.
The yield on the benchmark 10-year U.S. Treasury note has risen about 92 basis points to 2.59 percent since the end of April.
Gross, in an interview with cable television network CNBC on Thursday, said investors can still expect returns of 2 to 4 percent from bonds. But he said Pimco "made a mistake" in suggesting that returns from stocks will be limited to between 3 and 5 percent. The S&P 500 has risen more than 19 percent this year.
Gross has said previously that investors should expect lower returns on both stocks and bonds as a result of excessive credit in developed economies.
Gross also addressed two potential successors to Fed Chairman Ben Bernanke, whose second four-year term as chairman at the U.S. central bank expires on Jan. 31.
If former Treasury Secretary Lawrence Summers were to be nominated, it would be positive for lower inflation and longer-term bonds given Summers's aversion to easy money policies, he said. If current Fed Vice Chair Janet Yellen were nominated, it would be positive for shorter-term bonds because she would likely keep policy rates lower for longer, he said.
Pacific Investment Management Co, a unit of European financial services company Allianz SE, had $1.97 trillion in assets as of June 30, according to the firm's website.