Bill Gross, chief investment officer of bond giant Pimco, said on Friday the yield on the benchmark 10-year U.S. Treasury note belongs in the 2.50 to 3 percent range "now and for the next few years" if the Federal Reserve remains accommodative.
"When the Fed begins its upward journey – June 2015 – then it must be cautious and probably needs to stop at 2 percent sometime in 2017 because we have a highly levered economy, structural demographic headwinds which lower real growth and the effect of technology and job displacement," Gross told Reuters.
"When the Fed begins, how quickly it proceeds and where it stops is critical to bond yields as well as stock prices."
Analysts polled by Reuters in the past week now expect rates to be hiked in the second quarter of 2015, based on the median, instead of the third quarter seen a month ago.
Policymakers slashed rates to fight the deep 2007-2009 recession and have held them near zero since 2008. The Fed will likely raise its target for the overnight lending rate, known as the fed funds rate, to 0.25 percent between April and June next year, according to the median forecast of 71 analysts polled in the past week. Economists now see the fed funds rate ending next year at 0.75 percent.
Even so, the bond market continues to defy expectations that yields would drift higher.
On Friday, the yield on the 10-year Treasury note was trading at roughly 2.49 percent.
Gross said Treasurys "seemed tied to German Bunds — at 10-year maturity, there is a record 135 basis points difference. At the margin, some European holders can sell Bunds and buy Treasurys and accept dollar currency risk at a small positive carry pick-up and a euro at very high levels."
Asked if the Fed is behind the curve in terms of raising rates, Gross said: "My thoughts are that the Fed went too far as it eased in 2008 — they should have stopped at 1 in order to provide semblance of return to savers. But what is done is done."
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