The Federal Reserve's promise that it will keep key policy rates low for a substantial period of time is likely to convince investors this year, but that may change next year, said Bill Gross, Pimco founder, managing director and CIO.
In his latest newsletter Tuesday, the 69-year-old billionaire investor said artificially high asset prices aren't fundamentally mispriced if the Fed can convince markets that it intends to remain highly accommodative by holding rates low.
"We believe that will be the case" in 2014, so risk assets like stocks and credit are likely to provide positive returns relative to cash, he wrote.
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But, if central bankers lose credibility in promoting low rates, "the center may not hold," and "markets may not outperform cash."
Gross also warned that liquidity in corporate bonds might be "challenged" as the Fed winds down its bond-buying stimulus program.
"As quantitative easing ends in the U.S., liquidity in corporate bonds will be challenged. If inflation begins to appear as a result of five years of artificially low policy rates worldwide, then assets may indeed be mispriced," he said.
The Pimco Total Return Fund, the money manager's flagship fund, which is managed by Gross, had $1.6 billion in outflows during its 10th consecutive month of net investor withdrawals in February, according to Morningstar.
The fund has returned 2.1percent so far this year.
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