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PIMCO Dumps All Remaining Treasuries in Total Return Fund; Six Reasons to Fade Bill Gross
Global Economic Trend Analysis ^ | 03/11/2011 | Mike Shedlock

Posted on 03/11/2011 6:39:48 AM PST by SeekAndFind

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

First, 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.

TOPICS: Business/Economy; Society
KEYWORDS: billgross; bonds; pimco; ustreasuries

1 posted on 03/11/2011 6:39:54 AM PST by SeekAndFind
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To: SeekAndFind
Is this clown Shedlock still calling himself "Mish"?

Gee, who should I trust? "Mish" or Bill Gross of Pimco, the largest bond fund firm on Earth?

When the biggest bond dealer on the planet says to sell U.S. debt, people might want to take him seriously. If U.S. debt was heading for a bull market, Gross would be the first one on the bandwagon as he was in the past.

Sorry, Mish. Your deflation theory is deflating fast.

2 posted on 03/11/2011 6:51:35 AM PST by Dr. Thorne (Buy Gold and Guns Now!)
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To: Dr. Thorne

Mish must be insane. And I beat Bill Gross out!

3 posted on 03/11/2011 6:56:20 AM PST by jdsteel (I like the way the words "Palin for President" make progressives apoplectic.)
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To: SeekAndFind

All too often you do better listening to contrary opinions than guru opinions.

4 posted on 03/11/2011 7:01:58 AM PST by grumpa (VP)
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To: grumpa

I’ll stick with Pimco.

5 posted on 03/11/2011 7:14:03 AM PST by Eric in the Ozarks (Go Hawks !)
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To: SeekAndFind
-—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.-—

In a lot of cases it is true that when sentiment is very lopsided in one direction, it pays to be a contrarian. However sometimes the crowd is right. I believe this is one of those times.

6 posted on 03/11/2011 8:33:39 AM PST by MichaelCorleone (Sarah Palin is America's Margaret Thatcher)
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