Posted on 03/10/2011 3:51:29 PM PST by blam
Pimco Dumps All U.S. Treasury Bonds, Six Reasons Why They Got it Wrong
Interest-Rates / US Bonds
Mar 10, 2011 - 12:43 PM
By: Mike Shedlock
Pimco's Bill Gross has been dumping US government debt in favor of other alternatives including emerging-market opportunities. Looking ahead, I think it's more likely to be a bullish setup for treasuries than not.
First, please consider the news.
Bloomberg reports Pimco’s Gross Eliminates Government Debt From Total Return Fund
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.
Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, according to the Newport Beach, California-based company’s website. The fund’s net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008.
Yields on Treasuries may be too low to sustain demand for U.S. government debt as the Federal Reserve approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco’s website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.
Treasury yields are about 150 basis points too low when viewed on a historical context and when compared with expected nominal gross domestic product growth of 5 percent, he wrote in the commentary. The Fed is scheduled to complete purchases of $600 billion of Treasuries in June.
Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. “Old- fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote.
Gross last month increased holdings of emerging-market debt to 10 percent, the highest since October, from 9 percent in January. He cut holdings of mortgage securities to 34 percent from 42 percent in January.
Six Reasons to Fade Pimco
I view this setup as favorable for US Government bonds. For starters there is no Pimco selling pressure, only potential buying pressure when Gross changes his mind.
Second, everyone seems to think the end of QE II will be the death of treasuries. While that could be the case, sentiment is so one-sided that I rather doubt it, especially if the global recovery stalls.
Third, the US dollar is towards the bottom of a broad range and any bounce could easily wipe out gains in higher yielding emerging-market debt.
Fourth, the global macro picture is weakening considerably with overheating in China, state government austerity measures in the US, and a renewed sovereign debt crisis in Europe on top of a supply shock in oil. Emerging markets are unlikely the place to be in such a setup.
Fifth, chasing yield means chasing risk, and that is on top of currency risk. Chasing risk is highly likely to fail again at some point, the only question is when.
Sixth, several interest rate hikes are priced in by the the ECB this year. Will all those hikes come? I rather doubt it, and if the ECB doesn't hike, look for the US dollar to rally, perhaps significantly.
Relative Value Traps
The alleged "relative value" of emerging markets may turn out to be nothing but an "absolute value" trap. Admittedly there is not much to like on a long-term basis about US treasuries either.
Should treasuries continue to sell off, it may very well be the case there are no hiding places at all, except for the universally despised US dollar.
Gross always talks his own book and I think this is crap.
RATINGS DOWNGRADE
After that, Bill Gross can buy back in to Treasuries and be one of the biggest bond winners ever.
Give me a break. There is no way that PIMCO could have a significant impact on the price of treasuries, much less the price of foreign bonds. I think he may be premature, but then there are some who will say that’s the time to sell. Once the panic begins, you’re selling into weakness.
It is hard to imagine that the price on these bonds will go any higher. As the author says..if interest rates do go higher the dollar may go up a little to offset the gains one would make in developing market bonds, but only if there are real buyers for US Treasuries. Right now..there aren’t any. The Fed is the buyer. I’ll bet on Gross.
“but only if there are real buyers for US Treasuries. Right now..there aren’t any. The Fed is the buyer. I’ll bet on Gross”
Exactly. It is the Fed who is doing the majority of the buying. Sounds like a lot of people agree with Gross here and around the world.
Absolutely.
Default is the only way out, long term.
Short term we can expect to see first "green shoots", then "boom times"...then EITHER deflationary collapse or hyper-inflation followed by deflationary collapse.
In the end it's universal collapse and default.
Treasuries aren't worth the paper they are printed on.
Bill Gross has more intelligence in the last knuckle of his pinky finger than Shedlock has in his entire body.
Shedlock has no love of big government. What he is pointing out is that European debt is risky; European equities are risky; Chinese equities and debt are risky; at current levels, precious metals and other commodities are risky. Despite falling by 20-60%, real estate is still risky.
And judging by today’s action, U.S. equities are risky, and U.S. federal debt can go up in value, at least for a while. We have been in a musical chairs economy since March 2008, when Bear Stearns plummeted to $2 per share, and insiders bought it to sell to J.P. Morgan Chase for $10 a few days later. The music will start playing again, either Friday or next week, but it is important to think ahead where your money should be the next time the music stops. We will face more crises in 2011 and 2012.
In the U.S. and Europe, hundreds of millions are facing an uncomfortable drop in our standard of living. Meanwhile, in China, India, SE Asia and Africa, hundreds of millions are short on food. This happened to France in 1789, and the first revolution was not the last.
During the Mississippi bubble (France 1716-1719), the Banque Generale incorporated, obtained the power to issue francs, received a monopoly on (future American) Louisiana and Missiissippi, a monopoly on the French/North American/African tobacco and slave trades, and the power to collect taxes for the king.
In modern American terms, it would as though Goldman Sachs owned Mississippi and Louisiana, Exxon, Microsoft, Apple, Philip Morris, Berkshire Hathaway, and the IRS.
Shares in the company went from 500 francs to 18,000 francs in just three years, and led to a stock market boom all over Europe. The French government issued a great many francs as everyone thought they were getting rich. And then someone wanted to exchange their shares for gold. This led to a run on the bank; stock in the company dropped from 18,000 francs down to 1, before trading stopped. The CEO had to leave the country to avoid the mob, who would have killed him.
This is not the change I am working to immanentize in 2012.
Um, PIMCO assets total over $1 trillion. The main fund, at $257 billion, is a Total Return fund, and is usually invested 30%+ in U.S. government bonds. It currently holds zero.
While helicopter Ben Bernanke ["The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost. ... A money-financed tax cut is essentially equivalent to Milton Friedman's famous 'helicopter drop' of money." - Ben Bernanke, 21 November 2002, to the National Economics Club, Washington, D.C.] can currently buy more U.S. bonds that Bill Gross, Bill Gross has often been the largest private buyer of bonds in the world.
Plus, many people consider Gross to be the world's leading expert on bonds.
If you believe in small government you must never fund it more than you have to. Of course your government will arrest or kill you if you do not pay taxes, but you do not have to buy their bonds
The news on Gross’s move is a month old. Any reaction has long since been baked into the market.
$257 billion is small change for the Fed.
“Plus, many people consider Gross to be the world’s leading expert on bonds.”
I believe that, but that doesn’t mean he’s just trying to manipulate the market. He knows when to get out.
That's exactly the way me and my old poker playing buddies 'read' it. ("There's no peaceful/bloodless way back from here)
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