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Pimco Dumps All U.S. Treasury Bonds, Six Reasons Why They Got it Wrong

Interest-Rates / US Bonds Mar 10, 2011 - 12:43 PM GMT

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 is 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.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2011 Mike Shedlock, All Rights Reserved.

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Comments

dapeng Yang 13 Mar 11, 04:13	right I think the author is not in any position to quote any numbers. Numbers aren't everything, but for now few numbers can support his arguments favorably. Honestly, sitting on top of a pile of USD (assets) is like sitting on top of a sierra near its tipping point before an avalanche.
Ron James 17 Mar 11, 06:42	Not Qualified to Criticize Financial Professionals Why would a guy who spends all of his days reading the mainstream media feel he is qualified to express a valid opinion on the investment decisions of professional bond managers? Mish, you have never managed assets professionally in your life. You fixate on the media and try to get hits on your useless blog by cutting and pasting articles from the media. How do you expect anyone to take you seriously? Please, stop embarrassing the financial profession and start working in it instead of the media.
brian Thiesen 17 Mar 11, 19:54	Financial Embarrassment Actually dude the entire financial profession is itself an embarrassment whether mish know this or doesn't know that. Your "profession" has proved itself useful in destroying all that is good in the world, so let mish or whoever criticize this or that, when you guys get your "act" together then talk
chris 18 Mar 11, 08:21	Peter Schiff was right Mish you owe peter schiff an apology, by the way you and prechter have cost me a ton of money.
sc 18 Mar 11, 17:31	Ton Money There's a rule to managing your investments.Always be prepared to take responsibility if you are taking the actions to transact it. If you cannot do that then either do not invest ,or give your money to someone who you have dilgently researched and let them manage it. Failing all of that if you invest because some 'tulip' wrote a blog and told you A+B=C was is what the future holds and if that was enough for you to pull the investment trigger then the only person who "cost you a ton of money" is YOU.