Skip to comments.Should We Be Alarmed That The Biggest Bond Fund In The World Has Dumped U.S. Treasury Bonds?
Posted on 03/09/2011 6:54:29 PM PST by blam
Should We Be Alarmed That The Biggest Bond Fund In The World Has Dumped All Of Their U.S. Treasury Bonds?
March, 9, 2011
Bill Gross, the manager of the biggest bond fund in the world, has forgotten more about bonds than most of us will ever learn. That is why the big move that PIMCO has just made is so unsettling.
At one time PIMCO held more U.S. government debt than any other bond fund on the globe, but now news has come out that they have gotten rid of all their U.S. government-related securities. So should we be alarmed? For months Gross has been warning that the bull market in bonds is coming to an end, and now it looks like he is putting his words into action.s Gross has often publicly decried the rampant government spending that has been going on over the last several years, and apparently he has seen enough.
He is taking his ball and he is going home. This really is a stunning move by PIMCO. Gross must really believe that something fundamental has shifted. Gross didn't get to where he is today by being stupid. But so far world financial markets are taking this news in stride.
Nobody seems all that alarmed that the largest bond fund in the world has dumped all of their U.S. Treasuries. But with world financial markets in such a state of chaos right now, shouldn't we all take note when one of the biggest players in the game makes such a bold move?
Gross believes that interest rates on U.S. Treasuries are way too low right now and that they will start going up when the Federal Reserve ends the current round of quantitative easing in June. Gross has indicated that if interest rates on U.S. Treasuries go up high enough, PIMCO might get back in.
But if interest rates do start going up that is going to make servicing the monolithic U.S. national debt much more expensive, and that would not be good news for U.S. government finances.
But would the Federal Reserve really allow interest rates on U.S. Treasuries to go up substantially? Wouldn't they just step in at some point and start buying U.S. government debt again?
But the truth is that the Ponzi Scheme of the U.S. Treasury issuing bonds and the Federal Reserve buying them up cannot last forever as Gross noted in his March newsletter....
"Basically, the recent game plan is as simple as the Ohio State Buckeyes three yards and a cloud of dust in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and whos to worry? This Sammy Scheme as Ive described it in recent Outlooks is as foolproof as Ponzi and Madoff until until well, until it isnt."
Gross also noted in his newsletter that the Federal Reserve is currently buying up about 70 percent of all new U.S. government debt.
So what is going to happen when that stops?
Nobody knows for certain, but it sure is going to be interesting to watch.
The market for U.S. Treasuries has not been working "normally" for quite some time now, and there is some legitimate doubt as to whether it will ever fully get back to "normal" again.
Meanwhile, the sovereign debt crisis in Europe continues to get even worse.
The yield on 10-year Portuguese bonds is now above 7 percent, the yield on 10-year Irish bonds is now above 9 percent and the yield on 10-year Greek bonds is now above 12 percent.
Most people expect European leaders to soon come to an agreement to add billions more to existing bailout funds, but there is no guarantee that is actually going to happen.
In fact, the Germans are making waves by insisting that the financially troubled nations in the EU must be willing to agree to limits on their future budget deficits. A recent article on CNBC described the situation this way....
Before the Germans will agree to pump in extra cash from their taxpayers, backed by the French, they want each leader to agree to legislation at home that will limit the size of their future national deficits. The Greeks are already refusing point blank. Things may boil to the surface at an extraordinary summit on Friday.
So what if an agreement can't be reached?
Could the dominoes in Europe start to fall?
Very few people actually want to see a wave of sovereign defaults in Europe, but the current situation cannot go on forever. At some point the Germans are going to get sick and tired of bailing out other members of the EU.
The global addiction to debt is about to start having some very serious consequences.
For decades, most of the governments of the industrialized world have been running up debt as if it would never come back to haunt them. Now the world is absolutely covered in red ink and everyone is looking for a way to solve the problem.
But there is not going to be a debt jubilee to come along and save everyone. This debt bubble is either going to keep expanding or it is going to burst.
At one point, at least some of the debt-ridden nations will try to inflate their way out of debt by recklessly printing money. To a certain extent that has already been going on. But it will not work. It will only cause a whole lot of inflation.
This is just more evidence that any economic system based on debt is destined to fall. When we allowed a private central bank to start issuing debt-based currency in this country back in 1913 we set ourselves up to fail. As I have written about previously, the Federal Reserve should never have been allowed to come into existence, and it should have been shut down by Congress long before now.
But now the United States is caught in the same debt trap that most of the other nations around the world are caught in. The global addiction to debt is going to have some very, very serious consequences. Instead of moving into a great time of peace and prosperity, everything is about to come falling apart.
Things could have been different. Things did not have to turn out this way. But here we are on the edge of one of the biggest financial disasters in human history and most Americans still don't understand what is happening.
Only if nobody showed up to buy it from them.
Nah, Obama said his friend is going to print more. We have no worries.
Michael Moore said, “Yea, we got debt, but we aren’t broke.” “It is like you have a car payment, having a car payment doesn’t mean your broke”
Obviously yes, but we are in uncharted territory here so it will be a wild ride. My personal investments are moving heavy into S. American companies.
Even the worlds biggest bond fund is still only chump change in the total market for US treasuries, the US treasury bond auctions of late have been over subscribed and yields have declined.
The Fed has been selling all the bonds now.
Like, totally, like oh my God!
What language are you trying to speak?
What language are you trying to speak?
All this selling......... who the hell is buying all these bonds?
Huh? In the article above, I just read that the Fed was buying up 70% of the treasuries. Having someone magically make "money" out of thin air and buy up your debt with it hardly sounds like there is a market for said debt. Or am I misunderstanding things?
True but it is only part of the story. The money center banks buy the bonds from the treasury. They flip them within days to the Federal Reserve Corporation. Without the Federal Reserve being the final buyer, the auctions would fail.
I'm looking at PIMCO Moderate Duration Fund (PMDRX) and it's still chock full of all kinds of US debt obligations.
Long term bad, I suppose, but....they haven't completely flown the coop just yet.
“Like, totally, like oh my God! “
What language are you trying to speak?
It almost sounds like the took a page from the Housing Bubble Scheme book. As long as Fannie and Freddie will buy the mortgage paper, even if it is no good, the Countrywides kept writing them. Now the banks are buying the bonds because the know the Fed will buy them.
No known one. Why do you ask?
Bonds have risen as high as they are going to go now that interest rates are as low as they can get. The Treasury should be converting as much of this debt as possible to long term bonds to lock in the low interest rate.
If that is true then the Fed is draining money out of the system.
“This really is a stunning move by PIMCO.”
Maybe they are going to hold cash for a while then buy bonds when the yields are higher. Inflation anyone? Remember the 70’s?
“the Federal Reserve is currently buying up about 70 percent of all new U.S. government debt”
So, would this be considered a new type of Ponzi scheme?
The Return of the Bond Vigilantes.
“Like, totally, like oh my God! “
That is called “Valley Girl” speak, “like, gag me with a spoon.”
It is an old song done by one of Frank Zappa’s kids.
Like, 1980, totally.
I hated that song.
Been using that simple rule for 64 years, not that hard to do if you think as an adult.
I saw Gross on Tech Ticker this week. He looks like he has aged dramatically. That guy is really really stressed out about something...
Nobody else in the world wants our junk bonds anymore. The only serious buyer is the Fed and they use fake money... so...
“PIMCO (biggest bond fund) Dumping All Treasuries, Bringing “Government Related” Holdings To Zero”
I disagree with Durden on his assumption that “Bill Gross is now convinced there will be no QE3 at all.” Treasury bonds (especially long term) have been a no-no for some time, according to many other advisors and managers. If there is another quantitative easing move, bonds will still be risky. Same with mortgage backed securities, wherever QE3 would go.
We might take a look at where much money is likely going in the longer term: net energy exporters advancing. ...and where it is leaving: declining net energy importers with the worst sovereign debt problems.
Someone else said that about him too.
It's a bad day for me to be answering this question: I am just furious. This action is the single most egregious fraud that I have personally witnessed over course of three decades.
Last fall al Arian and Gross were on CNBC very oftern, seemed like twice a week. At the time, I was telling anybody who would listen that bonds are unlikely to go higher because: (i) the rates had already fallen to the level of October 2008; and, more importantly, (ii) it'd become common sense to buy Treasuries. Too many people were urging that --- a sure sign of a bubble-think to me.
My opinion could and should be questioned, of course. The point is that buying bonds at the time was far from trivial. But what did Pimco do? Gross and al Arian were telling the world, day in and day out, how dangerous it was out there, everyone should be accumulating Treasuries, and rates will fall all the way to 2% from then current 2.5%.
And now, just a couple of months later they have zero investment in those bonds?! If this is not fraudulent --- urging people to buy as you are selling to them --- I don't know what is.
As you know, it's not easy for me to use such words; I've been taking flack for years now, trying to stop unfounded accusations against Wall Street, the Fed, etc. But do think that this behavior is fraudulent. I think it would qualified to be called such if, while advising others to buy, they themselves sold 20% of their holding. But zero holdings? It's like yelling, "You suckers!" to all those mutual fund managers that followed al Arian's and Gross' advice.
I am just furious. I've got to distance myself from these emotions before I can think about economics again.
Respectfully..... everyone is out to make a buck. This includes investment advisors, hedge funds, banks, the Fed, politicians, and even many of the media types.
I don’t know or fully understand what is happening. However, I do know that we are on a very dangerous path and one bad event in our economy, bond market, or our currency could mortally wound our nation. That is the thing that frightens me.
Everyone seems so consumed with the short-term news cycle of the economy but that is where many of the big boys make their money. I am concerned with the long term future of my kids.
Just a thought and I would not let today’s news ruin tomorrow.
These days you do have to ask yourself if this latest news is a headfake, or the real deal.
Here’s MISH’s take:
Pimco dumps; Six reasons to fade Bill Gross http://globaleconomicanalysis.blogspot.com/2011/03/pimco-dumps-all-remaining-treasuries-in.html
For those who don’t know, MISH is a deflationist, but he also likes gold. He got the 2008 crash right, but the ramping from March 2009, wrong.
Interesting. Mish spoke as though Gross bought treasuries instead of selling. I see paradoxes in quite a few opinion pieces last night and this morning.
Okay, I’m beginning to see. Quite a few investment advisors and managers have been warning clients away from bonds for many months (especially against long terms).
Meanwhile, there are people who’ve had faith in the economy as it is—”recovery” and all of that. They are more dependent on revenues from government. They are upset with Bill for selling down treasuries. Thus, the many misquotes and out-of-context quotes of Bill Gross.
Revenues for the various levels of government will continue to decrease. We’re still headed in the direction of a more inflated dollar (likely, IMO). Oil’s still high, and the dollar, low so far. ...only a few guesses from a history and macro- perspective.
Funny, BTW. If they were to stop making a lot of funny money, oil could go down a little before summer. But think about what that would do to a whole lot of incomes from government a little later. ...and the service economy, tourism, etc. IMO, the Fed. might even make more funny money because of Bill’s move to protect his investors.