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PIMCO favors shift into commodities, European debt

Tuesday February 3, 5:05 pm ET

NEW YORK, Feb 3 (Reuters) - As the U.S. economy picks up and inflation revives, fixed-income investors should favor commodities, European debt or even inflation-protected bonds, leading bond fund manager PIMCO said on Tuesday.

Bill Gross, managing director of California-based Pacific Investment Management Co., told CNNfn that investors were faced with the prospect of a steadily recovering U.S. economy, which ultimately will revive inflation and undermine bonds.

Gross said PIMCO works on the premise "that we are in a reflationary economy -- that is, the U.S. government and the Federal Reserve are trying to reflate in order to relieve the burden of this high, crushing amount of debt."

Gross said he did not expect the Fed to raise interest rates for "at least another six months" until sufficient jobs have been created to remove some of the slack in the economy.

"If we get higher inflation, not in 2004 necessarily, but in 2005, 2006 or 2007, then you want to look for reflatable assets, in other words, commodities," Gross said.

"You want to look for bond investments that are protected against higher inflation, that being TIPS (Treasury Inflation-Protected Securities) ... and overseas in economies like euroland, or Germany and France and the like, who are following the same (reflationary) policy," he said.

The vast amount of debt the U.S. government must issue to plug the $500 billion hole in its finances could also make Treasuries a less attractive option, Gross said.

PIMCO manages over $300 billion in assets and specializes in fixed-income securities.

Gross said if the U.S. budget deficit is left to spiral, the obvious danger would be higher interest rates, which would not only slow economic recovery but stifle growth.

"If all of a sudden the cost of that (debt) goes higher as opposed to lower, then economic growth almost necessarily has to be affected," he said.

"That doesn't mean a recession, but it might mean that we have much slower growth than we're expecting."


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