Bill Gross, head of the largest bond fund manager in the world, Pimco has recently turned bearish on U.S. Treasury Bonds. Gross' portfolio moves and commentary are dissected by bond fund investors and hedge fund managers looking for clues as to where Gross finds value in the financial markets.
In recent months, Gross has been an outspoken critic of budget deficits and quantitative easing. In Pimco's most recent letter, Gross pondered what the investment landscape will look like in the absence of quantitative easing.
"...nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?"
Gross followed up on those comments with a recent appearance on Tech Ticker where he recommended that investors sell U.S. treasuries and buy foreign bonds.
"The Treasury market typifies perhaps the most overvalued area of the bond market," Gross said.
Yields in the 2 to 3% area for longer term treasuries and amazingly are in the negative camp for what they call a real interest rate or a TIP (inflation protected security) trading at minus 0.15%"
Gross outlined the two reasons why the Treasury market is unattractive to bond investors.
"Those are the most overvalued (Treasuries) simply because the Federal Reserve has been maintaining a policy rate of 25 basis points for over two years and secondly because they have been buying lots of Treasuries on the open market. The quantitative easing program at an annual rate produces trillion and a half worth of purchases. The combination has produced a very overvalued Treasury market."
Despite the fact that Gross is bearish on U.S. treasury bonds, he is bullish on other ares of the bond market. For example, Gross sees opportunities in emerging market, corporate and sovereigns with higher initial real interest rates and wider credit spreads. He is bullish on shorter term (less than 5 years), floating rate bonds that are preferably denominated in currencies other than the dollar.
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