Beware of rising interest rates and falling U.S. dollar: Gross

Bill Gross of PIMCO, manager of the world's largest bond fund, said on Bloomberg TV that investors should consider bonds denominated in non-dollar currencies that will hold their values like the Canadian dollar, Mexican peso, and the Brazilian real.

He also favors floating-rate bonds and playing credit spreads (i.e., the difference in the yields of bonds with the same maturity but with different credit quality) over investing in fixed-rate bonds.

Gross' recommendations stem from his concerns about rising interest rates and the decline of the U.S. dollar. These views are in turn shaped by his negative views of U.S. economic policy.

Gross took shots at President Obama's recent compromise with the Republicans as an example of misguided government policy.

Obama's plan extended income tax cuts, put in place a payroll tax cut, and extended unemployment insurance benefits. Many prominent economists applauded the direction of this plan because it will boost the economy in the short-run, even though it will also increase the budget deficit.

Gross sees it in a different light.

He thinks the short-term boost is just another misguided program of borrowing from the future in order to spend in the present. Framing it in the context of the jobs market, it's sending the unemployed to shopping malls and grocery stores instead of giving them jobs.

A better plan, according to Gross, would be investing in capital equipment and education in order to raise the long-term competitiveness of the U.S. economy; doing so will also create more jobs.

Obama's misguided policy is one reason Gross thinks the U.S. dollar will continue to devalue and interest rates (the borrowing cost of the U.S. government) will continue to rise.

The Federal Reserve's second round of quantitative easing (QE2) is another reason.

Back in November, Gross called the program a Ponzi scheme and said it signaled the end of the 30-year trend of falling interest rates.

Email Hao Li at hao.li@ibtimes.com