By Katya Wachtel
NEW YORK (Reuters) - Bill Gross, the manager of the world's largest bond fund, is sounding like a Wall Street ghost-hunter in his latest investment letter.
Calling the current market environment "paranormal," Gross said this year will be characterized by "credit and zero-bound interest rate risk" and less incentives for lenders to extend credit.
Gross, who manages PIMCO's $244 billion Total Return bond fund, said the financial markets this year will continue to delever but sees a gloomy future ahead.
"It's as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century," Gross said in an investment letter released on PIMCO's website on Wednesday. "Welcome to 2012."
Last year was a humbling one for the PIMCO chief, as a bad bet against U.S. Treasuries led to an unusual "mea culpa" letter to investors. Treasuries were the best-performing bond class in 2011.
His fund saw redemptions of $5 billion in 2011, one of the first times investors pulled money from Gross's portfolio.
In the letter, Gross said "paranormal" was a more fitting description for the current economic environment than the phrase "New Normal," coined several years ago by his chief co-investment officer Mohamed El-Erian to describe a world of low-growth and high unemployment. This year, Gross argues that process will get messier.
"We are left with zero-bound yields and creditors that trust no one and very few countries. The financial markets are slowly imploding - delevering - because there's too much paper and too little trust," he said.
Those factors may lead financial markets to experience "the fat-left-tailed possibility of unforeseen - delevering - or the fat-right-tailed possibility of central bank inflationary expansion."
Gross told investors they should lower their return expectations for 2012, predicting 2 percent to 5 percent returns on investments in stocks, bonds and commodities.
(Reporting By Katya Wachtel; editing by Jeffrey Benkoe)