The era of sluggish growth characterized by Pacific Investment Management Co. as the “new normal” is ending, according to one of the firm’s deputy chief investment officers.
“Our view is that what you’ll see in next the few years is we’re going to head back to a new destination,” Scott Mather, head of global fund management and one of PIMCO’s six deputy chief investment officers, said in a Bloomberg Surveillance interview with Tom Keene and Michael McKee. The firm’s forecast for U.S. growth has increased to the high 2% level, “which is better than sub-2% level of growth that we’ve experienced for several years,” Mather said.
PIMCO, manager of the world’s largest bond fund, outlined the “new normal” scenario at its annual forum in May 2009 after the worst financial crisis since the Great Depression plunged the U.S. into recession. The Newport Beach, California- based firm’s co-founder and chief investment officer Bill Gross and the firm’s former Chief Executive Officer Mohamed El-Erian popularized the term and predicted the economy would expand at a below-average pace for the next three to five years as growth in developed countries slows and amid the “heavy hand of government.”
“We’ve already left the most intense period of deleveraging that really created all sorts of pressures and adjustments that needed to happen in the economy,” Mather said today.
PIMCO has been moving toward a more optimistic view of the economy since at least the beginning of 2013. In a March outlook it forecast U.S. growth of between 2.5% and 3%, as public sector revenues increased, pressures from taxes eased and consumption improved.
This moved the firm more in line with other economists, who project U.S. gross domestic product expansion of 2.7% in 2014, according to the average estimate of 78 responses in a Bloomberg survey. The U.S. grew 1.9% last year after expanding 2.8% in 2012.
Americans are growing more upbeat about the economy as near-record stock prices, higher property values and lower unemployment help bolster household finances. Further strides in the labor market that generate bigger wage gains would provide additional impetus for the consumer spending that makes up almost 70% of the economy.
The yield on the 10-year U.S. Treasury should settle around 4% over the next few years, Mather said. Analysts forecast 3.72% by the third quarter of next year, according to the weighted average estimate of 50 analysts in a Bloomberg survey.
Benchmark 10-year note yields fell two basis points to 2.66% as of 11:57 a.m. in New York, according to Bloomberg Bond Trader prices. A rally in 30-year bonds has pushed returns past 10% in 2014, the best start to a year in at least two and a half decades.
Mather, who joined PIMCO in 1998 after trading mortgage- backed securities at Goldman Sachs Group Inc. in New York, has emerged as part of a new generation of top executives at PIMCO, the $1.9 trillion bond firm that revisited its leadership plans after the unexpected resignation of heir-apparent El-Erian.
Gross named Mather a deputy CIO in January, along with Andrew Balls, Dan Ivascyn, Mark Kiesel, Virginie Maisonneuve, and Mihir Worah as part of the biggest management shakeup in PIMCO’s history.
Gross has stumbled in the past year after building one of the best long-term track records in the industry during the bull market. Since the 70-year-old examined his legacy in an investment outlook a year ago titled “Man in the Mirror,” his $232 billion PIMCO Total Return Fund has trailed 90% of similar funds. Over the past five years, the fund is beating 56% of peers.
El-Erian this week reaffirmed the idea of a “new normal” economy in his first television interview since his departure in March, saying that the markets are in “secular stagnation.” While the U.S. economy is healing, Federal Reserve Chair Janet Yellen won’t raise interest rates for a while, he said.