Updated Tuesday, September 23, 2014 as of 4:20 AM ET

Pimco’s Gross Calls Treasuries Climb 'Misguided'

(Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said gains in Treasuries this week were misguided.

Ten-year securities snapped two days of gains today. They advanced earlier amid speculation economic growth will slow as the Federal Reserve reduces its stimulus efforts, Gross said. Several policy makers said at the Fed’s last meeting that officials should be ready to vary the pace of its $85 billion in monthly bond purchases, according to minutes of the central bank’s Jan. 29-30 meeting released this week.

“The Treasury market has caught a bid based upon that potential expectation,” Gross said yesterday in New York on Bloomberg Television’s “Street Smart” with Trish Regan and Adam Johnson. “I sort of think otherwise. Yields, certainly in the mortgage market, and the Treasury market, might go up.”

The U.S. 10-year yield was little changed at 1.99 percent at 7:08 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2 percent note due in February 2023 was at 100 3/8. The yield dropped five basis points, or 0.05 percentage point, during the previous two days.

Treasuries returned 0.1 percent this week as of yesterday, according to Bank of America Merrill Lynch indexes. They have generated a 0.8 percent loss this year, the data show.

The U.S. central bank buys bonds to pump money into the economy, and it will probably stick to the policy through 2013, said Gross, who is based in Newport Beach, California.

Total Return

The $285.6 billion Pimco Total Return Fund has handed investors a 7.7 percent gain in the past year, ranking in the 93rd percentile among its peers, according to data compiled by Bloomberg. It has lost 0.1 percent in 2013. Pimco is a unit of Munich-based insurer Allianz SE.

Gross boosted holdings of Treasuries in the fund to 30 percent in January from 26 percent in December, according to the company’s website. Investors should buy five-year Treasuries and avoid longer-term bonds, which reflect future inflation, he wrote on Twitter on Feb. 8.

Discussions among policy makers about changes in stimulus prompted some concern that “this could hamper economic growth, so risk aversion is back,” said Ralf Umlauf, head of floor research at Landesbank Hessen-Thueringen in Frankfurt. Still it was “clearly in the minutes that the economy was weak in the winter quarter, and there’s no inflation pressure, so economically there’s no reason for the Fed to cut back soon,” he said.

The 10-year yield will probably climb to 2.20 percent by year-end, he said.

Slow Growth

Economic growth is slow enough to send yields lower, said Chungkeun Oh, who invests in Treasuries for Industrial Bank of Korea in Seoul. Oh said he bought Treasuries earlier this month when the 10-year yield was 2.05 percent.

“I’m not so confident in the U.S. economy,” he said. “The market data are negative sometimes.”

Ten-year yields will fall to 1.90 percent by March 31 and then rise to 2.32 percent by year-end, based on a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

The Commerce Department will revise its estimate of gross domestic product in the fourth quarter to 0.5 percent growth from a 0.1 percent contraction, according to a Bloomberg survey of economists before the report on Feb. 28. Orders for durable goods fell in January for the first time since August, a separate report will show Feb. 27, analysts estimate.

Debt Sales

The Treasury is scheduled to sell $35 billion of two-year notes on Feb. 25, the same amount of five-year securities the next day and $29 billion of seven-year securities on Feb. 27.

Indirect bidders, a group that includes foreign central banks, bought 54.5 percent of the $9 billion of 30-year inflation-indexed securities sold by the Treasury yesterday. That compared with 49.1 percent in the previous auction. Overall demand fell, with the so-called bid-to-cover over ratio dropping to 2.47 times the amount offered, from 2.82 times.

The securities are intended to provide a hedge against rising prices.

Pimco’s Gross said central bank efforts to spur growth will boost costs in the economy and inflation may quicken to 3 percent over the next few years. Consumer prices rose 1.6 percent in January from a year earlier, the Labor Department reported yesterday.

The yield difference between 10-year notes and similar- maturity inflation-linked bonds, a gauge of expectations for consumer prices, was at 2.53 percentage points today, up from 2.45 percentage points on Dec. 31. The average for the past five years is 2.03 percentage points.

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