Bill Gross, co-chief investment officer of PIMCO, the world's biggest bond fund manager, on Thursday urged lawmakers to cut the massive federal deficit but not so swiftly as to choke off the nascent economic recovery.
Speaking exclusively to Reuters Insider, Gross said: Let's cut the deficit, but let's do it gradually, so that real economic growth can take hold.
Lawmakers struck a deal on Wednesday that delays for two weeks a showdown over the current year's spending plan. Republicans are seeking some $61 billion of cuts to help reduce the deficit, estimated to hit $1.65 trillion this year, but Senate Democrats are preparing a measure that would keep funding essentially flat.
The first negotiations on the budget are expected to take place on Thursday, according to congressional aides. Wednesday's deal averted a government shutdown as funding for daily operations had been due to expire on Friday, March 4.
Gross, who oversees $1.2 trillion of assets at the Newport Beach, Calif.-based, investment management firm, said he does not expect a credible deficit reduction plan until after the 2012 elections.
Addressing the risk to markets from the mushrooming budget deficit, Gross said Treasuries are moving toward being less of a triple-A credit, echoing a concern many bond investors have how long the United States can retain the highest possible rating designated by credit rating agencies.
Gross, who has been avoiding U.S. government debt securities recently, said he suspects the yield on Treasuries will move higher this summer after the Federal Reserve brings an end to its $600 billion Treasury purchasing program.
In a more normal environment, the yield on benchmark U.S. 10-year notes would more closely track the nominal rate of gross domestic product growth, which Gross estimates to be roughly 5 percent.
A yield that high is not likely in this environment, but a 4.0 percent yield for 10-year notes is a rational expectation if the Fed disappears as the buyer of last resort, Gross said. The note currently yields 3.56 percent.
Turning his attention away from the situation, Gross saw European Central Bank President Jean Claude Trichet's comments Thursday on the inflation threat in the euro zone as signaling a near-term rate hike but not the beginning of a trend.
Trichet's use of the term strong vigilance following the ECB's monthly policy meeting was tough talk, there's no doubt about it, Gross said.
The ECB left benchmark rates for the region unchanged at a record low 1.0 percent. Gross said he now expects 25 basis points of increase thanks to high prices for oil and other commodities, which feature more prominently in the ECB's inflation math than in the Fed's.
Still, Gross said sufficient headwinds remain in the euro zone recovery to prevent any near-term rate increase from becoming a trend any time soon. (Reporting by Dan Burns, Jennifer Rogers and Jennifer Ablan)