Bill Gross, Mohamed El-Erian warn against counting the Fed out

Bill Gross, the former manager of the biggest bond fund, said policy makers may act at their next meeting in June. Mohamed El-Erian, chief economic advisor at Allianz SE, said the Fed may move twice this year. Mark Kiesel at Pacific Investment Management Co and New York Fed President William Dudley echoed the comments.

Gross and his colleagues are warning investors not to count out the Fed after the Labor Department reported US employers added 160,000 workers last month, short of the 200,000 positions projected by a Bloomberg survey of economists. Fed Chair Janet Yellen is also examining earnings, which rose 2.5 per cent from the year before, more than forecast. Two-year note yields are too low, according to Gross.

"I'm not so sure that June is out," said Gross, who now runs the Janus Global Unconstrained Bond Fund, speaking on Bloomberg Television May 6. "Yellen, more than jobs, is focused on wages. At 2.5 per cent, they're moving up."

US Treasuries were little changed Monday, with the benchmark 10-year yield at 1.79 per cent as of 7:15 am in London, according to Bloomberg Bond Trader data. The price of the 1.625 per cent security due in February 2026 was 98 18/32.

Two-year notes yields were at 0.73 per cent after falling to 0.68 per cent on May 6, which was the lowest level in almost three months. The yield was 23 basis points more than the upper end of the Fed's range for its benchmark. The average spread for the past year is 41 basis points.

A quarter-point rate increase would push the Fed's target range to 0.50 per cent to 0.75 per cent, with the upper end of the band climbing past the two-year yield, according to Gross. "I don't think it's appropriately priced," he said.

Gross had earlier been premature in calling an end to a global bond rally. "Developed market yields have bottomed," he wrote on Twitter on March 10. The yield on the Bloomberg Global Developed Sovereign Bond Index has fallen to 0.65 per cent from 0.79 per cent the day of the comment.

Financial markets that are relatively calm and a weakening dollar will make it easier for policy makers to act, El-Erian, who is also a Bloomberg View columnist, said on Bloomberg Television on May 6. "I do think they'll hike at least once, and they could hike twice this year," he said. The Fed "has a window," he said.

The odds of a rate increase in June are about 8 per cent, rising to 53 per cent by year-end, according to data compiled by Bloomberg based on fed fund futures.

Pimco's Kiesel, said the labour market is gradually improving. "They'll probably start with one or two hikes by the end of the year," he said on Bloomberg Television May 6.

The Fed's Dudley said it's reasonable to expect two moves this year, in an interview with The New York Times published on its website on May 6 following the release of the payroll report.

A Fed increase in June is unlikely, and that means the global economy will have time to grow without having to face a US central bank move that may curb the expansion, according to Enna Li at Mirae Asset Global Investments Co in Taipei.

Li said she added to her position in Asia high-yield securities in April and May, after the Fed on April 6 issued the minutes of its March meeting.

Several policy makers at the session expressed the view a cautious approach to raising rates would be prudent.

"We don't think the Fed will hike in June," Li said. "We think they might delay. The Asia market is still a good position." Indonesian government bonds are among her favourites, she said. Ten-year notes in the nation yield 7.79 per cent. Mirae oversees $83 billion.