Bill Gross, Jeffrey Gundlach and Dan Fuss, whose firms collectively oversee about $1.5 trillion, expect the Federal Reserve to conduct a third round of bond purchases as signs of strength in the U.S. economy fade and Europe's sovereign-debt crisis returns.
The managers at Pacific Investment Management Co. and DoubleLine Capital LP favor mortgage debt, while Loomis Sayles & Co. purchases corporate bonds. Speculation that the Fed will buy home-loan debt with quantitative easing has led 2012 returns on government-backed mortgage bonds to exceed Treasuries by 0.96 percentage points, Barclays PLC index data show.
Fed Chairman Ben S. Bernanke, Vice Chairman Janet Yellen and New York Fed President William C. Dudley signaled further easing may be needed if growth lags projections, with headwinds ranging from the end of tax breaks to $1 trillion of mandatory federal budget cuts to $100-a-barrel oil eating into consumer spending. The Standard & Poor's 500 has fallen as much as 4.8% from an almost four-year high on April 2.
“Should the stock market keep going down, it will be a portent of weaker economic data,” said Mr. Gundlach, whose $22.8 billion DoubleLine Total Return Bond Fund outperformed 99% of peers last year. “It will happen and when it does you will start to hear about more support programs.”
While gross domestic product grew at a 3% pace in the last three months of 2011, it will slow to 2.3% this year, according to the median estimate of 90 economists surveyed by Bloomberg.
Mr. Gross, the manager of the world's biggest bond fund, boosted holdings of mortgages last month to the most in almost three years. Mr. Fuss, a member of the Fixed Income Analysts Society Hall of Fame, said this week that the Fed may stick with quantitative easing until after the presidential election or the unemployment rate falls to about 6% from its current 8.2%.
Elsewhere in credit markets, Deutsche Bank AG, Barclays and Credit Suisse Group AG are among banks preparing bids for a $7.49 billion mass of real estate debt that the Federal Reserve Bank of New York assumed in 2008. The U.S. commercial paper market contracted to the lowest level in more than a month. Emdeon Inc., which Blackstone Group LP acquired last year, is seeking to set the rate on a $1.22 billion term loan repricing.