Mortgage Rates Likely Headed to 4.5%: Pimco's Gross

Monday February 9, 2009, 2:03 pm EST - - Government action to shore up the economy and improve the housing climate probably will send mortgage rates to 4.5 percent, Bill Gross, co-CEO at the Pimco bond fund, said Monday.

In addition to driving down mortgage rates and stimulating home-buying, the government's efforts also could include a move to cap Treasurys rates to encourage investors to take more risk, Gross said during a live interview on CNBC.

"I think at some point we're going to see a 4.5 percent mortgage rate and the 10-year Treasury rate capped at some level, " he said. "When the Fed comes in to buy Treasurys that will be a big day."

Looking ahead at the government initiatives he expects to see in an announcement Tuesday, Gross said the government likely will inject more capital into needy banks only. He also said the government will expand the Term Asset-Backed Securities Loan Facility,
or TALF, which aims to free up the ABS market.

That in turn would make commercial mortgage-backed securities an attractive investment, said Gross, head of the world's largest bond fund.

At the same time, he warned against government over-reaching that would lead to the nationalization of some of the nation's biggest banks, a move that would wipe out shareholder equity. "We need a clear plan tomorrow that moves away from nationalization, and private capital will come in," Gross said.

Overall, Gross praised the way the Federal Reserve has taken substantial measures to stem the financial crisis."They've spent $2 trillion of their balance sheet and taken some risk in terms of assets," he said. "I think they've done an excellent job so far in terms of shock and awe."