Pimco's Bill Gross, manager of the world's largest bond fund, said on Wednesday that the lower U.S. government deficit is slowing credit growth, a phenomenon that could hurt economic growth and risk assets.
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Gross, whose Pimco Total Return Fund has $237 billion in assets, said the decline in the U.S. government deficit in the past few years has resulted in slower credit growth, which in turn is negative for the economy in the near term since credit growth is critical to asset prices.
"Our PIMCO word of the month is to be 'careful,'" Gross said in his monthly letter to investors titled "Most 'Medieval'." "High quality bonds will continue to be well bid and risk assets may lose some luster."
Gross, co-founder and co-chief investment officer at Pimco, said that 3-4 percent credit growth in the United States may not be enough to support 3 percent economic growth, especially if asset prices decline.
Gross also said that the Federal Reserve's reduction in its monthly purchases of Treasuries and agency mortgages will contribute to the slowdown in credit growth.
The U.S. central bank announced a further $10 billion cut to its monthly bond-buying last month. The Fed has implemented the bond-buying program in an effort to stimulate U.S. economic growth and lower long-term borrowing costs.
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Gross's views are important because Pimco, with $1.92 trillion in assets as of Dec. 31 according to the firm's website, is one of the most closely-watched and influential bond investors.
Pimco has come under even closer scrutiny in recent weeks after the firm said last month that chief executive and co-chief investment officer Mohamed El-Erian would leave the firm in mid-March, leaving Gross as the sole chief investment officer.
The firm has since appointed six deputy chief investment officers to potentially succeed Gross. Many had viewed El-Erian as Gross's heir apparent to the role of chief investment officer.
Gross touted Pimco's current leadership in his latest letter.
"Believe me when I say, we are a better team at this moment than we were before," he said.
He also advised investors to "stick with PIMCO." Investors pulled $3.5 billion from Gross's flagship Pimco Total Return Fund in January, extending last year's record net outflows of $41.1 billion, according to Morningstar data.
Despite the latest outflows from Gross's fund, investment gains in January left the fund's total assets roughly unchanged. The fund posted a total return of 1.35 percent last month after Treasuries prices rallied on some weak U.S. economic data and a rout in emerging market assets.
The fund's performance marked a turnaround from last year, when it fell 1.92 percent, marking its worst annual loss since 1994 after fears of a pullback in the Federal Reserve's monthly bond-buying stimulus led to a plunge in bond prices.
The weak performance spurred last year's record outflows from Gross's fund. While better, the performance in January trailed more than half its peers according to Morningstar data, along with the benchmark Barclays U.S. Aggregate bond index's gain of 1.48 percent.
The Newport Beach, California-based Pacific Investment Management Co. is a unit of European financial services company Allianz SE.