Pimco Save More, Spend Less Economy Cuts Total Return

Sept. 30 (Bloomberg) -- Pacific Investment Management Co.’s Bill Gross says investors should expect total returns on equities of about 5 percent annually as consumers curb spending and increase savings.

“Returns mimic nominal” gross domestic product, Gross, manager of the world’s biggest bond fund, said in an interview yesterday with Bloomberg Radio. “Nominal GDP is the growth rate of wealth on an annual basis. The new normal is 2 to 3 percent GDP and real growth of 1 to 2 percent.”

Officials at Newport Beach, California-based Pimco say the “new normal” for the global economy will be characterized by heightened government regulation, lower consumption and slower growth. The Standard & Poor’s 500 Index increased 13 percent on average in the five years ended in 2007, before falling 37 percent last year as economies slid into recession. During the last two bull markets, the S&P 500 posted an average total return of 18.5 percent a year.

The U.S. savings rate rose to 6 percent of disposable income in May, the highest level since 1998. Only 8 percent of U.S. adults plan to increase household spending, almost one- third will spend less, and 58 percent expect to “stay the course,” a Bloomberg News poll showed Sept. 17. More than three in four adults said they cut outlays in the past year.

GDP Revision

The world’s largest economy shrank at a 0.7 percent annual rate from April to June, the best performance in more than a year, revised figures from the Commerce Department showed today. GDP contracted at a 6.4 percent pace in the first three months of 2009. The jobless rate climbed to 9.8 percent this month, from 9.7 percent in August, according to a separate Bloomberg survey before the Labor Department reports figures on Oct. 2.

Gross said he’s been buying longer maturity Treasuries in recent weeks as protection against deflation.

“There has been significant flattening on the long end of the curve,” Gross said “This reflects the re-emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth.”

Consumer prices fell 1.5 percent in August from a year ago, according to the Labor Department in Washington. Prices have declined on an annual basis every month since March.

Yields on U.S. inflation-protected debt show there’s little concern about consumer prices eroding the value of bonds’ fixed payments. The difference in rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, is 1.76 percentage points. While up from 0.04 points in November, the level is below the average of 2.18 points over the past five years.

Breakeven Rates

The U.S. has the lowest so-called breakeven rates of any major sovereign debt market except Japan. The difference between three-year maturities is 0.6 point, below the average of about 2.21 points this decade.

Gross had said during the midst of the seizure in credit markets that Treasuries offered little value as investors seeking a refuge from turmoil in global financial markets drove yields to record lows in December.

He has since boosted the $177.5 billion Total Return Fund’s investment in government-related bonds to 44 percent of assets, the most since August 2004, from 25 percent in July, according data released earlier this month on Pimco’s Web site. The fund cut mortgage debt to 38 percent from 47 percent.

“We’ve exchanged our mortgages for the government’s check” as the Federal Reserve winds down purchases of agency debt, Gross said. “Mortgages are expensive compared to Treasuries and other vehicles.”

Program Extended

Fed policy makers last week committed to complete their purchases of as much as $1.45 trillion of mortgage securities and extended the end of the program to March from December.

Pimco’s Total Return Fund handed investors a 17.85 percent gain in the past year, beating more than 90 percent of its peers, according to data compiled by Bloomberg. The one-month return is 1.94 percent, outpacing more than 55 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE.

In July Pimco reversed a policy to steer clear of U.S. debt when it said it would buy five- to 10-year Treasury securities.

“With Treasury yields near the top of our expected range, Pimco plans to overweight duration and take exposure to the five- to 10-year portion of the yield curve,” the firm said July 20 in a report on its Web site.

On that day, the yield on the 10-year note touched an intra-day high of 3.72 percent and a low of 3.57 percent. The note yielded 3.29 percent yesterday in New York, according to BGCantor Market Data.

Gross said intermediate- to long-term bonds will perform well as long as policy rates and inflation remain low, after minutes of the Federal Open Market Committee’s Aug. 11-12 meeting was released on Sept. 2.