Pimco Dumps Bonds Like Last Year's Prom Date

Bill Gross can't ditch US treasuries fast enough. Here's why!

Remember when I was talking about the Pimco vs. Vanguard debate? Well, seems that Pimco has taken that debate a step farther and is putting its money--LOTS of its money--where its mouth is. Pimco's Bill Gross is frantically unloading US treasury issues.

How frantically, you ask? Simple--nine months ago, the Total Return Fund, which is Gross' bailiwick, was fully fifty percent in US treasuries. Now it's thirty. He dropped almost HALF HIS LOAD in just nine months.

And he's got good reason, too. There are two things keeping Gross metaphorically up nights. One, the big one, inflation. A rapid and frantic increase in the money supply, as we're so very likely seeing here, is going to suck the value right out of them. Two, Johnny Fed is hemorraging cash on a scale heretofore unimagined by mortal man. This in turn means that huge pots of money will have to be raised...which means a lot more treasuries will have to be sold and, once again, that will drive down the prices and up the rates.

I can't help but agree with him. Let's face it, considering how much debt the United States has taken on in the last sixteen months, would you be terribly willing to lend them more? Unless, of course, they were offering spectacular interest rates? And even then you might not be too willing. But the takeaway here is that interest rates are going to have to go up just to draw investors. The bond market is going to get slammed like the mosh pit at the Warped Tour if it were hip deep in a mix of hash and acid.

And where is Pimco parking that cash? Corporate and foreign bonds, both of which are less likely to spiral upward in rates soon.

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Comments

  • Sol Nasisi

    April 13, 2010

    "I can't help but agree with him. Let's face it, considering how much debt the United States has taken on in the last sixteen months, would you be terribly willing to lend them more? "

    Last week's 10 year auction was oversubscribed 3:1 and Treasuries sold for below 4%. The world is still very willing to lend to the US at low rates and shows no sign of changing. But that's not surprising. Where else are you going to pack cash? Certainly not Europe as the EU strains and cracks. BRIC countries are good for speculative investments but are not safe havens. Japan is in worse shape with enormous debt and deflation. That leaves the US.

  • SteveAnderson

    April 14, 2010

    Sol--if you're Bill Gross, foreign issues and corporate bonds. That's where else you'll pack cash.

    And just because we're still the leper with the most fingers doesn't make us a hot property.

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