PIMCO’s Gross Says Fed Exit May Debilitate Markets

(January 7, 2010) — Bill Gross, the king of debt investing who runs the world’s biggest mutual fund at Pacific Investment Management Co. (PIMCO), said that as governments withdraw stimulus measures, asset markets in the U.S. and U.K. may see tough times ahead.

In a monthly investment outlook, Gross, managing director and a founder of PIMCO, said the U.S. economy is likely not strong enough to handle the end of the Federal Reserve’s quantitative easing program meant to decrease borrowing costs and stimulate growth. He expressed concern over the Fed’s withdrawal of liquidity to markets and he focused on the Fed’s plans to stop its program of buying Fannie Mae and Freddie Mac mortgage-backed securities, scheduled to end in March.

“Most ‘carry’ trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their ‘sugar daddy,’” Gross said in a four-page commentary posted on PIMCO’s Web site, entitled “Let’s Get Fiscal.” He added that if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the nearly $2 trillion of government checks written in 2009.