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Bond guru Gross turns bearish

PIMCO manager says strong economic growth worldwide should push up interest rates and yields.

By Grace Wong, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Legendary bond investor Bill Gross expects strong economic growth worldwide to push up global interest rates and put a damper on the Treasury market.

A long time bond market bull, the PIMCO manager says he's now a "bear market manager" and has raised his forecast range for the benchmark 10-year U.S. yield to 4 percent to 6.5 percent. That's up from last year's forecast range of 4 percent to 5.5 percent.

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PIMCO's Bill Gross

Gross, manager of the world's largest bond fund, discussed his economic and investment view at an annual PIMCO event. His comments were made available on PIMCO's Web site Thursday.

Stocks extended their losses on Gross's bearish view of the bond market. Recent concerns about rising interest rates have sent Wall Street into a tailspin. The Dow has shed about 400 points in the past three sessions.

Treasury prices have dived on inflation worries, global rate hikes and concerns of possible rate increases from the Federal Reserve. On Thursday, the 10-year yield rose above the key 5 percent level for the first time since August. Bond prices and yields move in opposite directions.

Gross said he expects global growth to advance at a strong pace of 4 percent to 5 percent over the next three to five years and for inflation to rise mildly in the United States and worldwide. That combination "is not necessarily bond-friendly," his comments said.

Years of strong growth in low-cost countries have helped keep inflation contained, but inflation should drift higher as the labor forces of Asia and other emerging markets are incorporated into the global economy, Gross said.

Besides inflation rising slightly higher, the bond market faces other pressures. Central banks and asset managers are likely to shift away from safe-haven investments, such as U.S. Treasurys, as they seek out higher yields, Gross said.

The appetite of foreign central banks for low-risk assets like U.S. Treasurys has been one of the reasons why yields on U.S. government bonds have remained low for so long.

Gross said investors should take advantage of global growth. He said PIMCO is making bets on emerging market currencies as well as commodities. When it comes to bonds, developing markets like Brazil should offer attractive yields, he added. Top of page