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.
"Let's cut the deficit, but let's do it gradually" so that real economic growth can take hold, Gross (left) told Reuters in an interview after his testimony.
The news service notes 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, Reuters reports.
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 over 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%, Reuters says.
A yield that high is not likely in this environment, but a 4% 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%, the news service notes.
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.