NEW YORK Bill Gross, manager of The Pimco Total Return Fund, said on Wednesday that the global economy may be facing low policy rates for decades.
Gross wrote in his October investment outlook that investors should "bet against" expectations that the federal funds rate - the U.S. Federal Reserve's benchmark short-term borrowing rate - will rise by one percentage point by late 2015.
"The U.S. (and global economy) may have to get used to financially repressive - and therefore low policy rates - for decades to come," wrote Gross, a co-founder and co-chief investment officer at Pimco, whose flagship Pimco Total Return Fund has roughly $250 billion in assets.
"Right now the market (and the Fed forecasts) expects fed funds to be 1 percent higher by late 2015 and 1 percent higher still by December 2016. Bet against that," he wrote in the letter entitled "Survival of the Fittest?"
Gross's outlook on the level of rates is important because Pimco manages roughly $1.97 trillion and is one of the world's largest bond managers. Gross and co-Chief Investment Officer and Chief Executive Mohamed El-Erian's views on Fed actions and global credit also influence other investors because of the firm's size in the marketplace.
The Fed has held its overnight funds rate between zero and 0.25 percent since December 2008 and has more than tripled its balance sheet to around $3.7 trillion in an effort to pull the U.S. economy out of recession and spur stronger economic growth.
On September 18, the Fed reiterated that it would not start to raise interest rates at least until unemployment falls to 6.5 percent, as long as inflation does not threaten to go above 2.5 percent. The U.S. jobless rate in August was 7.3 percent.
Most policymakers, 12 out of 17, projected the first rate hike would not come until 2015, even though the forecasts suggested they would likely hit their threshold for considering a rate rise as early as next year.
The Fed also surprised investors by keeping its $85 billion in monthly purchases of Treasuries and agency mortgages unchanged, confounding many who had expected a reduction.
The yield on the benchmark 10-year U.S. Treasury note plunged 17 basis points to 2.69 percent following the Fed decision. Bond yields move inversely to their prices. The yield on the benchmark 10-year U.S. Treasury note is currently 2.6 percent.
Gross also said in the letter that a portfolio of Treasury inflation-protected securities (TIPS) and shorter-dated bonds could return 4 percent in future years.
Gross's Pimco Total Return Fund gained 1.8 percent in September, its best monthly performance since January 2012, according to data from Morningstar. That performance beat 98 percent of peers, the investment research firm said.
The fund is still down 1.97 percent for the year, according to the Pimco website. The Newport Beach, California-based Pacific Investment Management Co. is a unit of European financial services company Allianz SE.
Gross's fund had outflows of $5.4 billion in September, marking the fifth straight month of outflows from the fund, Morningstar data showed on Wednesday. While the withdrawals were sizeable, they were the lowest since May.
Investors also pulled $220.3 million from the Pimco Total Return ETF in September. That also marked the fifth straight month of outflows from the actively managed ETF, which is designed to mimic the strategy of the flagship bond fund.
The withdrawals from the roughly $3.9-billion ETF came despite its gain of 1.7 percent in September, which made it the top performer among its peers, Morningstar data showed.
As a firm, Pimco had outflows of $6.5 billion across its U.S. open-end mutual funds last month, marking the fourth straight month of outflows from the funds, according to Morningstar. The outflows marked an improvement from withdrawals of $11 billion in August.
Gross told CNBC television on Wednesday that there is virtually no chance the U.S. government will default on its debt by October 17. U.S. Treasury Secretary Jack Lew has warned Congress the United States would exhaust its borrowing capacity no later than that date.
"The possibility of default on the part of the U.S. Treasury is a million to one, and perhaps even in the billions," Gross said. He said the U.S. Treasury collects about $300 billion in monthly revenues while paying out about $40-45 billion in monthly interest.
"There's no possibility that the U.S. Treasury would ever think of and would ever be in a position of defaulting, based upon that coverage," Gross said.
A resolution to the looming fight between Democratic and Republican lawmakers over raising the $16.7 trillion federal debt ceiling is expected to be reached on October 17. A failure to increase the borrowing limit could cause the government to default on its debt, analysts have said.
(Reporting by Sam Forgione; Editing by Chizu Nomiyama, Krista Hughes, Leslie Gevirtz and Nick Zieminski)