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Fed Move Means Risky Treasurys: Pimco's Gross

Wednesday, 12 Aug 2009 | 4:11 PM ET

The Federal Reserve said on Wednesday it will extend the duration of a program to buy long-term government securities, and said the economy was showing signs of leveling out after 20 months of recession. Ken Volpert, portfolio manager at Vanguard Funds, and William Gross, co-CIO and founder of Pimco, shared their insights on the Fed’s decision.

Gross’ Outlook:

“Everyone knows we have an inventory pop coming in the second half and GDP will be positive,” Gross told CNBC.

Reaction to the Fed
A reaction to the Fed's decision and the impact on the markets, with Susan Bies, former Federal Reserve governor; William Gross, Pimco co-CIO; Ken Volpert, Vanguard principal and CNBC's Steve Liesman.

“In terms of the Treasury buyback program, I think they’re trying to have it both ways—it looks like at the end of October they will end that particular program and continue with mortgages and agency purchases at least until the end of the year.”

Gross said investors have to be cautious as the Treasury still has up to $2 trillion to issue on a fiscal year basis.

“The Chinese are pulling back, the Asians are pulling back, the holders of reserves are pulling back so if the Fed itself ends the program that was $300 billion, then you have less demand going forward,” he said.

In the meantime, Gross said he recommends that investors look into short-term securities of AIG and their subsidiaries that yield 10 to 15 percent.

“There’s about $40 billion of TARP money that’s backing them up for the next few years at least and that’s some good value,” he said.

Volpert's Outlook: 'Very Encouraging'

Volpert’s Outlook:

“I thought [the Fed] said the same things that I had anticipated,” said Volpert.

The economy is "leveling out—it was slowing—and now they’re saying we’re bottoming out and they’re expecting growth going forward, especially inventory accumulation,” he said.

Fed Decision: Rates Unchanged
CNBC's Hampton Pearson has the Fed's decision of keeping the rates unchanged.

Volpert said credit is becoming more available, which will create an easier environment for markets to grow.

“Even though the Treasury rates are up about 2 percent, corporate yields are down about 2 percent—high-yield bonds have declined 8 percent in yield. So credit is much more available,” he said.

"It’s been an unprecedented rally in corporates that really is now making it much more feasible for the market to grow going forward, and it will feed on itself as it grows so it’s very encouraging.”

"We continue to like investment grade credit," said Volpert. He believes that the spreads have further room to run.

“With money market funds at 0 percent, that’s a lot of money moving out of money market funds out into credit and I think that’s a good trade,” he said.

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Disclosure:

No immediate information was available for Gross or Volpert.

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