Bill Gross: Fed's 'Hot Air' Will Keep Bond Bubble Aloft

After getting burned in 2011 by betting against Treasuries, Bill Gross learned a time-honored lesson: Don't fight the Fed.

"Of course there is" a bubble in the bond market, PIMCO's founder and co-CIO tells The Daily Ticker. "[But] I don't think rates are going to go much higher...the Fed is blowing lots of air -- some say hot -- and constantly inflating the bubble."

As announced at its most recent FOMC meeting, the Fed plans to buy $45 billion of Treasury securities per month starting in January, in addition to the $40 billion of mortgage-backed-securities it has been buying.

The $80 billion to $90 billion of checks per month will "keep that balloon inflated," says Gross.

While acknowledging the Fed's power to "keep that balloon inflated," Gross does not believe its powers are unlimited.

"Ultimately, over time, not necessarily in next three to six-months, [quantitative easing] creates an inflationary impact," says the manager of the $285 billion PIMCO Total Return (PTTRX) fund and its eponymous ETF (BOND). "That suggests investors be leery of long-term bonds which are sensitive to long-term inflation and to be more focused in intermediate and front-end [bonds] with some confidence. Yields will not go much higher simply because the Fed is in there blowing hot air."

As detailed in his latest monthly letter on PIMCO's Web site, Gross is betting on outperformance in 2013 from assets that benefit from rising inflation, or fear thereof, including:

  • Commodities like Oil and Gold
  • U.S. Inflation-Protected Bonds
  • Non-Dollar Emerging-Market Stocks

"It's difficult to know exactly when inflation takes hold -- it can come in the form of commodities or stronger real growth, which we don't foresee," he says. "These types of efforts -- not only on the part of the Fed but the ECB, the Bank of England and Bank of Japan -- ultimately are provided to elevate and reflate their economies."

In addition to what he calls "long-dated developed-country bonds," Gross also recommends investors avoid (or underweight) high-yield corporate bonds.

For all the investors who've rushed into bond funds in recent years, Gross has the following advice for 2013: "Be leery and recognize [that] yields in the investment grade market -- mortgages, Treasurys and corporates -- only yield 1.7%. It's difficult to squeeze much juice from an orange that yields 1.7%."

Full disclosure: I own the PIMCO Total Return fund, which has returned over 10% in 2012.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him