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Bill Gross: Fed to end rate hikes soon

Believes the Fed will end hikes this summer, then send rates lower; cautions against hedge funds.
June 21, 2005: 2:45 PM EDT

 


CHICAGO (Reuters) - Bill Gross, one of the world's most influential bond investors, said Tuesday he expects the Federal Reserve will stop raising interest rates this summer and start cutting again, perhaps by year's end.

"Central banks don't rest at one rate for long and if only to impart a bid to the U.S. housing market, they (the Federal Reserve) may have to start cutting again as early as the end of the year," Gross, who oversees $445 billion in fixed income securities as chief investment officer at PIMCO, told reporters.

Gross, a featured speaker at the Morningstar Inc. investment conference, said he expects the Federal Reserve, which has been raising interest rates gradually for months, may end this cycle in August after pushing rates to 3.5 percent.

"I think the Fed will have to stop shortly," Gross said, adding, "I know this differs from conventional wisdom, which has the Fed stopping at around 3.75 percent."

In terms of investment choices, Gross said European debt, particularly longer-dated German bonds, look slightly better than U.S. government debt now because the investments will pay more when converted back into U.S. dollars.

"When its hedged back into U.S. you pick up about 50 basis points or more over the U.S. yield," Gross said.

Still Gross, like other stock and bond pickers, cautioned U.S. investors against expecting their money to earn big returns these days.

Even hedge funds, which often promise to make money in all types of markets, aren't capable of delivering the out-sized returns that made them famous years ago, Gross said.

Hedge funds' high fees -- they often charge at least a 1 percent management fee plus a 20 percent performance fee -- are likely to eat into any gains these loosely regulated funds make, Gross told hundreds of financial planners at the conference. Many of these planners are now turning to hedge funds to try and boost their clients' portfolios a bit.

While U.S. central bankers have recently said they are not worried about the role hedge funds play in the markets, Gross said these types of funds introduce volatility into markets that might make more conservative investors step to the sidelines.

Speaking about Federal Reserve Chairman Alan Greenspan, Gross said, "He would take the other side and say the volatility hedge funds are adding is a good thing but I think that type of volatility can't be a good thing."

Last month markets were roiled by talk that several hedge funds were on the brink of collapse, hurt when ratings agencies downgraded auto makers General Motors' (Research) debt to junk. Since then, performance data on the $1 trillion hedge fund industry has shown that many convertible arbitrage funds absorbed heavy losses.

For Tuesday's up-to-the-minute market news, click here.

In CNNFN.COM