BUSINESS
Updated October 2, 2012, 11:52 a.m. ET
Bill Gross: Bonds Could Be 'Burned to a Crisp'
By MIN ZENG
The world's biggest bond fund, run by Bill Gross, took in $2.8 billion in new cash last month, boosting the inflow for the first nine months of the year to $12.1 billion, even as he warned that bonds could be "burned to a crisp" if the U.S. doesn't tackle its debt problems.
The data, released by fund tracker Morningstar Inc. MORN -0.64%Tuesday, signals that the $278 billion Pimco Total Return Fund continues to draw new investments as Mr. Gross's fund has churned out a return that has pulled significantly ahead of the benchmark index.
The fund, which has beefed up its holdings of mortgage-backed securities of late, has handed investors a return of 9.19% through Monday, beating the 4.07% of the Barclays US Aggregate Bond Index, according to data from Morningstar. The fund has beaten 91% of its rivals this year.
Over the past 15 years, the bond fund has returned 7.36%, compared with the 6.13% return on the benchmark.
Mr. Gross is founder and co-chief investment officer at Pacific Investment Management Co. Part of Allianz ALV.XE -0.68%SE, Pimco is one of the world's biggest asset-management companies, with more than $1.8 trillion under management.
In his October investment outlook, also released Tuesday, Mr. Gross unleashed another stern warning on how the U.S. fiscal woes may dethrone Treasury bonds' status as the world's go-to safe haven, and the dollar's role as the world's premier reserve currency. Mr. Gross has argued over the past months that the growing share of U.S. public debt in the economic output is worrisome and that the U.S. will struggle to kick its debt habit.
"If the fiscal gap isn't closed even ever so gradually over the next few years, then rating services, dollar reserve-holding nations and bond managers embarrassed into being reborn as vigilantes may together force a resolution that ends in tears," Mr. Gross said in the report.
Mr. Gross explained that without efforts to shrink the increasing ratio of debt to gross domestic product, the Federal Reserve would print money to pay for the deficiency, which could lead to inflation that hurt values of both the dollar and longer-dated Treasury bonds.
"Bonds would be burned to a crisp and stocks would certainly be singed," he said. "Only gold and real assets would thrive in the 'ring of fire'."
To hedge against the inflation risk, Mr. Gross has cut down holdings of Treasury debt to 21% at the end of August compared to 33% in July.
But for now, Mr. Gross, like some other fund managers, has said he believes the Fed's continued purchases of bonds would help lift bond prices, thereby pushing down bond yields.
The Fed announced on Sept. 13 it plans to buy mortgage-backed securities as part of a third round of quantitative easing stimulus, nicknamed QE3. The central bank signaled that it may potentially buy unlimited amount of bonds until the labor market shows a sustainable and strong recovery, a more aggressive stance compared to previous rounds of monetary stimulus.
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The fund "is well positioned for this announcement," Mr. Gross said in an interview last month with Dow Jones Newswires.
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Mr. Gross made heavy wagers on U.S. high-quality mortgage-backed securities on the prospects that the Federal Reserve would buy this market as a way to support the economy. Half of his bond fund was in MBS at the end of August, according to the latest data available from the company's web site.
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