Gross: Why Pimco Dumped Treasurys From Biggest Fund - CNBC

The world's largest bond fund has moved out almost entirely from US debt and into that of emerging markets and corporations, Pimco's Bill Gross told CNBC.

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Speaking a day after news broke that Pacific Investment Management Company had dumped its Treasurys holdings from its $236.9 billion Total Return fund, the Newport Beach, Calif.-based firm's managing director said it would return once yields grew more attractive.

"It's not a question of dissing the United States or questioning the credit of the United States, but simply a maturity reflection," Gross said. Treasurys are "mispriced relative to the inflationary environment and the growth we see ahead and there are better alternatives in order to capture yield."

Gross primarily based his evaluation on the reduction in yields caused by the Federal Reserve's buying of close to $2 trillion in Treasurys, with more slated before the second leg of the program—often called QE 2—comes to an end.

"When a trillion and a half dollars worth of annualized purchasing power disappears I simply question as to who will buy them and at what yield," he said. "We're suggesting at these yields it might be problematic."

Instead, the firm has moved its money to other debt until the rate structure changes.

"Those would be corporate bonds, those would be a smattering of high yield bonds and a growing proportion of emerging market debt which yields in the 5 to 6 percent category," he said. "Are these bonds as safe as Treasurys? No, they are not triple-A types of investments but they're not overvalued based on quantitative easing procedures that we've seen over the past 12 months.

"So we've moved into Brazil and Mexico and moved money, yes, at the margin into Spain, which has a better balance sheet than the United States."

He said the Total Return fund has returned about 5 percent, whereas a Treasurys portfolio would yield about 2 percent.

by Jeff Cox CNBC.com March 10, 2011

Gross: Why Pimco Dumped Treasurys From Biggest Fund - CNBC

Exclusive: Bill Gross Dumps All Treasuries, Brings Total "Government Related" Holdings To Zero, Flees To Cash - No QE3? | zero hedge

And many thought Bill Gross was only posturing when he said he is getting the hell out of dodge. Based on still to be publicly reported data by Pimco's flagship Total Return Fund, the world's largest bond fund, in the month of January, has taken its bond holdings to zero (and -14% on a Duration Weighted Exposure basis). The offset, not surprisingly, is cash. After sporting $28.6 billion in "government related" securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion (based on total TRF holdings of $236.9 billion as of February 28). This is the most cash the flagship fund has ever held, and the lowest amount in Treasury holdings since January 2009 before it was made clear that the Fed was going to adjust QE1 to include Treasurys in addition to Mortgage Backed Securities. PIMCO's Treasury holdings peaked in June 2010 at $147.4 billion and have declined consistently ever since. And while we expected that the spike in MBS holdings (at times on margin) was indicative of an expectation that QE3 would monetize mortgage backed securities, the ongoing decline in that asset class now leads us to believe that Bill Gross is now convinced there will be no QE3 at all, at least based on his just putting his money where his monthly pen is! 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.

Note the plunge in Treasury holdings in the chart below (blue line), offset by the surge in cash (dotted pink line). Time to panic.

And when it comes to duration adjusted holdings, something wierd is going on: PIMCO has increased its holdings of securities with a 0-1 duration to 14%, quite possibly the highest ever, and certainly the most to where our records go back. The effective duration on the entire portfolio dropped to 3.89, the lowest since December 2008.

Source:

By Tyler Durden ZeroHedge March 9, 2011

http://www.zerohedge.com/article/exclusive-bill-gross-dumps-all-treasuries-brings-total-government-related-holdings-zero-flee

Bill Gross Telling Bloomberg To "Avoid Dollar Denominated Government Debt" Probably Means Bond Rout Is Over

When Nassim Taleb and Marc Faber say that US government debt is a suicide investment, one can be allowed some skepticism. After all, they are likely just talking their book. On the other hand, when the manager of the world's biggest bond fund, whose flagship fund Treasury holdings amount to almost $80 billion goes on Bloomberg and says to "avoid dollar-denominated government debt" better known as US Treasuries, and instead recommends viewers invest in "stable" currencies like the Peso, the BRL or the CAD, then you know the bottom in bonds is in. So in addition to dumping fixed rate bonds (which means Pimco will again be able to buy on the cheap ahead of QE3, which as Larry Meyer has by now likely advised Pimco is a sure thing), Gross also told Bloomberg that his other two strategies are to buy floating rate debt (over fixed), and lastly recommend credit spreads over interest rate duration risk. For those who find something troubling with a $1 trillion fixed income manager talking down his investments, and are still wondering whether or not QE3 is coming, we suggest putting one and one together. And while at it, they should also consider that Pimco now holds over $100 billion in MBS: a notional amount last held just as QE1 was announced.

Dec. 31 (Bloomberg) -- Bill Gross, manager of the world's largest bond fund at Pacific Investment Management Co., talks about his investment strategy. Gross, speaking on Dec. 22 with Tom Keene for Bloomberg Television's "Surveillance Midday," also discusses U.S. fiscal policy and European debt markets. (Source: Bloomberg)

4.25by Tyler Durden Zero Hedge December 31, 2010

by Tyler Durden Zero Hedge December 31, 2010

Bill Gross Telling Bloomberg To "Avoid Dollar Denominated Government Debt" Probably Means Bond Rout Is Over

Bonds not looking so attractive

Bond investors avoided the ax and didn't wind up as the main course on anyone's Thanksgiving dinner table last week.

But a year from now, things could be different.

The bond market has been safe and secure for so long that investors could run around the farmyard and throw money at bonds with little chance of harm. Those old goats in the stock market, outside the corral, always faced the danger of getting dragged off by a wolf, but not bond investors.

At least that's been the thinking for years, as bonds benefitted from a lengthy trend of lower interest rates and mild inflation. But the protective pen that has sheltered bond investors doesn't look so secure anymore.

William Gross, managing director at California investment firm PIMCO, lately has warned of the "end of a great 30-year bull market in bonds."

Considering that Gross and his team oversee about as much bond money as anyone and have a vested interest in seeing bonds perform well, that's a caution worth heeding.

Roy Papp of L. Roy Papp & Associates, one of Arizona's more successful long-term investors, describes the situation for bonds as among the most treacherous he's seen in a career spanning five decades.

"Economic conditions around the world will improve, particularly in the U.S. and Asia," Papp said. "As that happens, prices on bonds will go down."

He now views stocks as "considerably" more attractive than bonds.

The portfolio managers at Ariel Investments in Chicago recently declared that bonds had reached "bubble territory."

In their view, three traits are characteristic of bubbles, and the bond market is showing signs of all three now.

The first is a surge of new money that inflates prices. Mutual funds that hold bonds have attracted more than $600 billion in net new cash since the start of 2009 and now are in their 23rd straight month of inflows.

By contrast, investors on balance have pulled money out of stock funds in each of the past three years.

The second is a tendency for prices to climb into unchartered territory. With bonds, this is usually described in terms of yields, which move inversely to prices. The recent numbers portray investors as willing to accept almost nothing in return for the privilege of owning bonds. Case in point: The government sold two-year Treasuries yielding just 0.4 percent in late October.

"When judged against historical valuations, bonds are in nosebleed territory," Ariel wrote in its commentary.

The third warning sign is a pattern of risks and returns getting out of whack. As evidence, Ariel cites yields that are now so low as to provide virtually no cushion in the event inflation rises even modestly.

Ariel adds that bond-market volatility could be worsened in the next downturn by the rise of Internet trading and easy-to-exit exchange-traded funds - neither of which was around during the last bond bear market.

Somewhat-naive investors often dismiss the riskiness of bonds by noting that they can recoup their principal provided they're willing to hold to maturity, regardless of what happens to interest rates.

That's true, assuming the issuer doesn't default. But there's still an opportunity cost in the sense bondholders would be stuck with an unattractive, below-market yield in the meantime.

In other words, in a rising-rate environment, investors must pick their poison: Sell their bonds and take a loss, or accept a below-market yield until their bonds mature and proceeds can be reinvested at higher, prevailing interest rates.

The point of all this isn't to scare investors into making rash decisions but to nudge them to prepare for some unpleasant possibilities, sooner or later.

In a diversified portfolio, it's difficult to avoid bonds altogether. It's also true that certain types of bonds and bond funds, such as high-yield and foreign debt, aren't as sensitive to U.S. interest-rate changes and might hold up well if rates jump.

But these alternatives also tend to be more risky than the plain-vanilla municipal, high-grade corporate and U.S. government bonds that most income investors favor.

If you have jumped onto the bond bandwagon, it's time to consider how you might get off if the 30-year bull market is indeed nearing an end.

Or as Gross put it in a recent bond-market outlook: "Run, turkey, run."

by Russ Wiles The Arizona Republic Nov. 28, 2010 12:00 AM



Bonds not looking so attractive

PIMCO's Gross Sees Government Backing of Mortgages Undesirable but Necessary « HousingWire

The cost of private origination and securitization justifies government involvement in the housing market, according to PIMCO bond-fund guru Bill Gross.

In his monthly investment outlook, Gross said 95% of existing mortgages written over the past 12 months were government guaranteed because the private market contracted so much, reiterating what he said last week at the Treasury Department’s housing-finance summit in Washington.

Gross' answer to the housing collapse recognizes "the necessity, not the desirability, of using government involvement," including rolling FNMA, FHLMC, and other housing agencies into one giant agency and guaranteeing a majority of existing and future originations" Gross said.

Gross said the private/public nature of Fannie Mae and Freddie Mac ultimately led to their demise because that structure “incentivized executives and stockholders to go for broke with the implicit understanding that Uncle Sam would be there as a backstop should anything go wrong.”

Gross believes origination points and private insurance fee would instantly disappear, if the housing market continues to be government dominated. In his proposal for what to do with the GSEs, he claims taxpayers would be protected through tight regulation, adequate down payments, and an insurance fund bolstered by a fee of 50 to 75 basis points attached to all mortgages.

"If you eliminated the private incentive and provided a tighter regulatory watchdog, we would have no more ‘liar loans’ or ‘no docs’ and a much sounder foundation for future homeowners and investors," Gross said. "The private market, to my mind, had really lost its claim as the most efficient and judicious arbiter in this particular case. Markets and private incentives without proper guardrails were as threatening to a sound economy in the 21st century as too much regulation and government ownership proved to be in the 1970s."

by JASON PHILYAW HousingWire August 24, 2010


PIMCO's Gross Sees Government Backing of Mortgages Undesirable but Necessary « HousingWire

Pimco's Gross' Bold Plan - CNBC.com

Pimco's Gross' Bold Plan - CNBC.com

Summit on Fannie Mae, Freddie Mac eyes reform

WASHINGTON - The Obama administration got what it was looking for Tuesday at its summit on the future of housing finance, big ideas that ranged from a government-sponsored refinancing of millions of mortgages to blowing up the structure that's backstopped mortgage lending for decades.

Tuesday's summit, in the Treasury Department's ornate Cash Room, was a starting point for a debate that will unfold in months ahead and carry consequences for all Americans.

How this debate is decided could affect everything from the supply of affordable rental housing to tax deductions for mortgage interest to whether Americans pay significantly more to be homeowners.

The process that began Tuesday also is likely to spell the end, at least in their current form, of mortgage-finance titans Fannie Mae and Freddie Mac, which have been in government conservatorship since September 2008. The mortgage leviathans, which were seized by the government after huge losses from subprime mortgages, have cost U.S. taxpayers nearly $150 billion.

Treasury Secretary Timothy Geithner put down some wide markers Tuesday on what he envisions for mortgage finance.

"We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support," he said in introductory remarks. "We will not support a return to the system where private gains are subsidized by taxpayer losses."

Fannie Mae was created in 1938 to boost homeownership after the Great Depression. Freddie Mac was created in 1970 to provide more competition. The two congressionally chartered private entities buy mortgages originated by lenders and pool them into bonds backed by U.S. mortgages. For decades, this has freed banks and other mortgage lenders from having to retain the loans on their books and allowed them to keep lending to homebuyers.

The administration hasn't said what it will propose to Congress by January. The summit was intended to gather ideas and reaction from those involved in mortgage finance. Those present Tuesday ranged from bankers who underwrite loans to financiers who buy mortgage bonds to consumer advocates who want more affordable rental housing.

The summit began with a bang when Bill Gross, the managing director of PIMCO, the world's largest bond fund, proposed that the Obama administration order Fannie Mae and Freddie Mac to refinance all outstanding mortgages that they back or guarantee into today's historically low interest rates.

Doing so, he reasoned, would free up a significant amount of income for millions of Americans, who then could boost the economy by spending that additional disposable income.

Known as a maverick in financial circles, Gross also declared dead the private sector's secondary market for mortgages, where they're pooled together and sold to investors as bonds. The Obama administration should recognize this, he said, and explicitly guarantee all pools of new mortgages going forward.

Getting the government out of mortgage lending, Gross and others warned, may mean mortgage rates 3 or 4 percentage points higher than they are today.

by Kevin G. Hall McClatchy Newspapers Aug. 18, 2010 12:00 AM


Summit on Fannie Mae, Freddie Mac eyes reform

Bond king Gross says nationalize Fannie and Freddie - NYPOST.com

There's only one way to fix the badly dilapidated housing market, and that's to fully nationalize mortgage giants Fannie Mae and Freddie Mac.

That's the advice from bond king Bill Gross, who was among the executives asked to attend a Capitol Hill summit yesterday to hash out the fate of Fannie and Freddie, which were taken over by the government during the financial crisis.

Gross, who runs the world's largest bond fund, Pacific Investment Management Co. (Pimco), said keeping Fannie and Freddie as wards of the state may be the only permanent means of propping up the $11 trillion housing market.

"The only way to bring housing back and to create liquid, financeable mortgage finance going forward would be to provide a government guarantee," Gross said yesterday at the daylong summit.
Gross' comments at the summit were at odds with the views expressed by Treasury Secretary Tim Geithner, who said that Uncle Sam can't go back to the faulty model that left Fannie and Freddie choking on toxic mortgages two years ago, requiring a $150 billion taxpayer-funded rescue.

"The government's footprint in the housing market needs to be smaller than it is today," said Geithner, who co-hosted the summit. "We will not support returning Fannie and Freddie to the role they played before [the government took them over]." As it stands now, Fannie and Freddie, which are 80-percent owned by Uncle Sam, back about 80 percent of all US mortgages. One fear is that buyers of mortgage-backed securities won't purchase more mortgages if the government doesn't provide a guarantee.

Given that Fannie and Freddie guarantee such a massive chunk of the home mortgage market, Gross has recommended that the Obama administration push the two institutions to refinance millions of mortgages -- a move he says would inject as much as $60 billion into the collective wallets of homeowners and boost housing values by as much as 10 percent.

Gross' support for fully nationalizing the mortgage companies isn't novel. Some believe the Newport Beach, Calif.-based money manager's advice is in support of his firm, Pimco, which holds huge positions in mortgage debt.

"Nationalizing Fannie and Freddie may be a great trade for Pimco, but I think nationalizing the whole mortgage system is not a realistic option," said Jon Trugman, founder of New York-based hedge fund Pendulum Capital.

Yesterday, government officials and financial executives bandied about a raft of options for the beleaguered mortgage giants, including offering temporary guarantees on mortgage debt until the economy stabilizes.
Dismantling the entities in place of one gigantic mortgage co-op in which other mortgage lenders would own shares was also floated.

However, Geithner didn't appear to outline any specific game plan yesterday for dealing with Fannie and Freddie. Retooling the mortgage entities has been a nagging issue for the Obama administration and a problem that could cost taxpayers as much as $1 trillion, according to estimates.

"Here we are after passing the financial reform bill and we still can't have an honest conversation about [Fannie and Freddie]," said Christopher Whalen, managing director for Institutional Risk Analytics.


By MARK DeCAMBRE New York Post August 18, 2010

Bond king Gross says nationalize Fannie and Freddie - NYPOST.com

Pimco Cuts Government Debt, Boosts Emerging Markets - Bloomberg

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of U.S. government-related debt in July as yields tumbled.

The company’s $239.3 billion Total Return Fund’s investment in the debt was cut to 54 percent of assets last month, from 63 percent in June, according to the website of Newport Beach, California-based Pimco. The share of emerging-market debt increased to a record 11 percent, from 10 percent. The fund also boosted mortgage debt to 18 percent, the most since September.

The fund has returned 12.8 percent in the past 12 months, beating 70 percent of its peers, according to data compiled by Bloomberg. It gained 1.95 percent over the past month, a performance superior to 78 percent of competitors. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.1 trillion of assets as of June 30.

Pimco’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the firm’s website.

Gross boosted the Total Return Fund’s mortgage composition in July from 16 percent in June. It increased its high-yield holdings to 4 percent, from the 3 percent level, and non-U.S. developed debt to 5 percent from 3 percent. It increased its net cash-and-equivalent position to negative 12 percent from negative 15 percent.

Eight-Month High

Gross boosted the fund’s composition of government-related debt to an eight-month high in June, following weaker-than- expected economic reports.

He said earlier this month that the Fed is unlikely to raise interest rates for two to three years as it seeks to keep the economy from slipping back into recession.

The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period” of time in its statement on Aug. 10, holding the target lending rate for overnight lending between banks at zero to 0.25 percent.

“When you analyze that portion of the curve, it says the Fed is on hold for a long, long time,” Gross, said on Aug. 6 during a radio interview on “Bloomberg Surveillance” with Tom Keene. “When you get down to 50 basis points on two-years, that’s giving you a signal that there’s not much left on the table.”

Two-Year Note

Two-year note yields touched a record low 0.4892 percent on Aug. 11, a day after the central bank’s decision to reinvest principal payments on mortgage assets it holds into U.S. debt to support the economy.

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement in Washington. “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level.”

In testimony before the Senate Banking Committee on July 21, Fed Chairman Ben S. Bernankesaid the “economic outlook remains unusually uncertain.” St. Louis Fed President James Bullardwrote in a paper released July 29 that the central bank should resume purchases of Treasuries if the economy slows and prices fall.

The central bank bought $300 billion of government debt from March to October 2009 to bring down borrowing costs.

U.S. economic growth slowed to a 2.4 percent annual rate in the second quarter from a 3.7 percent pace in the first three months of the year.

Pimco's El-Erian Interview Excerpt

Aug. 13 (Bloomberg) -- Mohammed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., discusses Federal Reserve monetary policy. El-Erian, speaking with Tom Keene and Ken Prewitt on Bloomberg Radio's "Bloomberg Surveillance," also discusses deflation and the outlook for the U.S. economy. (This report is an excerpt of the full interview. Source: Bloomberg)

by Susanne Walker Bloomberg August 13, 2010

Pimco Cuts Government Debt, Boosts Emerging Markets - Bloomberg

Pimco's El-Erian Says Chance of U.S. Deflation Is 25% - Bloomberg

The U.S. faces a 25 percent chance of deflation and a double-dip recession, according to Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., which runs the world’s biggest bond fund.

“I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario,” said El-Erian, 51. U.S. unemployment will probably stay unusually high, he told reporters today in Tokyo.

Companies are accumulating cash and individuals are saving, making it tougher to counter deflation, El-Erian said. That reduction in private-sector spending makes government policies to stimulate the economy less effective, he said.

A mix of the lowest U.S. inflation rate in four decades and concern that the global recovery will falter is boosting Treasuries, sending two-year yields to a record low this week.Bill Gross, who oversees the record $239 billion Pimco Total Return Fund, raised holdings of U.S. government-related debt in June to the highest level in eight months, according to the company’s website.

A U.S. report tomorrow will show the nation lost jobs for a second month in July, economists said. The unemployment rate climbed to 9.6 percent from 9.5 percent, the survey showed.

The U.S. two-year note yielded 0.57 percent at 7:58 a.m. in London, after reaching a record low of 0.5143 percent on Aug. 3. The 0.625 percent note due July 2012 traded at a price of 100 3/32, according to BGCantor Market Data.

Consumer Prices

Consumer prices excluding energy and food held at a 44-year low of 0.9 percent in June, according to the Labor Department.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has narrowed to 1.82 percentage points from this year’s high of 2.49 percentage points in January. Deflation is a general decline in prices.

Federal Reserve Chairman Ben S. Bernanke said Aug. 2 that rising wages will probably spur household spending in the next few quarters

While the U.S. has “a considerable way to go” for a full recovery, “rising demand from households and businesses should help sustain growth,” Bernanke said in a speech in Charleston, South Carolina.

Savings Rate

The savings rate for American households increased to 6.4 percent in June, the highest level in a year, according to the Commerce Department.

U.S. companies held cash reserves and liquid assets of $1.64 trillion as of March 31, 26 percent higher than the same point a year ago, according to the Federal Reserve.

Economic growth slowed to 2.4 percent in the second quarter from 3.7 percent in the first. It will be 2.7 percent in the July-to-September period and 2.8 percent in the last three months of the year, a Bloomberg survey of economists shows.

U.S. gross domestic product contracted 2.6 percent last year.

The $239 billion Total Return Fund managed by Bill Gross in Newport Beach, California, returned 12.8 percent in the past year, beating 68 percent of its peers, according to data compiled by Bloomberg.

Pimco, which managed more than $1.1 trillion of assets as of June 30, according to its website, is a unit of Munich-based insurer Allianz SE.

Pimco's Gross Interview Excerpt on Jobs Data

Aug. 6 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., talks about the outlook for the U.S. unemployment rate and the need for U.S. policy changes. Gross, speaking with Tom Keene on Bloomberg Radio's "Bloomberg Surveillance," also discusses investment strategy. (This is an excerpt of the full interview. Source: Bloomberg)

by Yusuke Miyazawa and Wes Goodman Bloomberg August 5, 2010

Pimco's El-Erian Says Chance of U.S. Deflation Is 25% - Bloomberg

Snaptu: PIMCO dumping Treasuries

by Henry Blodget The Business Insider, April 12, 2010

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.

http://www.fiercefinance.com/story/pimco-dumping-treasuries/2010-04-12

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