Tuesday, April 13, 2010

Pimco's Bill Gross Disses Treasury Securities

As Henry Blodget points out, nine months ago, Bill Gross's Total Return Fund was 50% in US Treasuries. Now it's only 30%, the lowest percentage in the 23 year history of the fund, says Nelson Schwartz of the NYT.

Why is Gross dumping Treasuries?

Two primary concerns:
  • Inflation
  • The massive tidal wave of money the US needs to raise in the coming years, which will increase the supply of Treasuries (driving prices down and rates up).
More broadly, Gross believes that, while interest rates have now generally been declining for more than 25 years, we're now moving to an era in which rates will rise, not fall.

PIMCO has shifted money into corporate bonds and foreign bonds, including Germany.

Germany is an interesting play. While money printing will be increasing globally, the ECB tends to be more conservative and inflation sensitive than the rest of the world. Thus, on a relative basis, once the current out of character Fed tightening ends, the euro is likely to outperform the dollar.

German is likely to also have a much more stable economy than the U.S. or China, for that matter. Further, a breakup of the EU, which may be a short-term negative for the euro, would very likely turn into a long term plus should Germany return to the mark.

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