GLOBAL - PIMCO's Bill Gross is urging investors to play the safe end of the credit space by shunning duration risk, as rising inflation hits yields.
The manager of the world's largest bond fund said treasuries are failing to compensate investors for the risks they are taking, given the inflation outlook, and he urged investors to look to "cheap" bonds in other segments of the market.
"Investors should focus on ‘safe spread', which means buying more floating and fewer fixed rate notes," he said in a strategy note.
"They should buy into additional credit components such as investment grade, high yield, non-agency mortgage or emerging market related debt, and shade their portfolio in the direction of non-dollar emerging market currencies," he said.
While the upcoming end of QE2 is expected to lead to higher interest rates and rising yields, Gross shot down the idea of buying into treasuries, warning the outlook remains uncertain and yields looked poor value on a historic basis.
He blamed the government's easy play on debt for causing bond prices to near "boiling point" while leaving yields at artificial lows.
"Prices are near the boiling point with the Fed, the Chinese and the banks all buying up whatever treasury bonds are offered. With coupons near subzero, CPI adjusted, total return is jeopardised, or if not it is certainly trapped in a future low return kettle of water," he said.
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