By David Berman
It seems amazing that the U.S. bond market has failed to respond to the bombshell announcement on Wednesday that Bill Gross’ Pacific Investment Management Co. (or PIMCO) ditched all – yes, all – of its U.S. government holdings last month. PIMCO’s Total Return Fund is the world’s biggest bond fund, with assets of about $237-billion, so this isn’t a marginal move by any means.
In January, the fund’s U.S. government holdings accounted for 12 per cent of those assets. Now, the exposure is zero – and the move has big implications for how other investors will view Treasury debt (and perhaps the U.S. dollar) in the months ahead. After all, Mr. Gross is as influential to the bond market as, say, Warren Buffett is to the equities market.
According to a report in the Wall Street Journal, Mr. Gross sold the government debt out of a belief that the Federal Reserve’s quantitative easing program has been propping up bond prices beyond where they would naturally be. When the QE program ends – and Mr. Gross believes it will end in June – then bond prices will likely fall.
Of course, many observers expect that the Federal Reserve will introduce another round of quantitative easing once the current program ends, to keep borrowing costs low and help stimulate the economy. However, Mr. Gross’s move suggests that he sees no such “QE3” in the works.
“And if Bill Gross, the most connected person to the upcoming actions by the Fed, believes there is no more quantitative easing, it is really time to get the hell out of dodge in all security classes – bonds, and most certainly, equities,” said the blogger Zero Hedge, who was the first to report the PIMCO sale.
Of course, Mr. Gross’s own high-profile exit raises the question of where he is investing the proceeds of the sale. He isn’t: The fund’s cash levels have surged to an extraordinary 23 per cent of assets, from just 5 per cent in January. According to the Journal, though, the fund has been raising its exposure to corporate and emerging market debt, and has plans to invest in preferred shares later this year.
Remarkably, the bond market has failed to respond to this news. The U.S. government auctioned $21-billion worth of 10-year bonds on Wednesday, and the yield on the bond fell to 3.47 per cent from 3.55 per cent on Tuesday, meaning that bond prices actually rose.
Disclosure: None
