Bill Gross Explains PIMCO's Negative "Government-Related" Exposure, QE3 Will Be Policy Language

Bill Gross, who runs the $240 billion PIMCO Total Return Fund (PTTRX), was on Bloomberg TV today explaining why the fund increased its negative "government-related" exposure, and if it meant the fund was short treasuries. He said it was related to swaps which are derivatives. Watch the Bloomberg video after the jump for more information. He also talked about Greece, the debt ceiling and U.S. Dollar.

As of 4/30/2011, the PIMCO Total Return Fund increased "net cash and equivalents" to 37% from 31% on 3/31/2011; decreased "mortgage" exposure to 24% from 28%; decreased "investment grade credit" to 17% from 18%; increased "emerging markets" to 11% from 10%; remained unchanged on "non-US developed"; decreased "high-yield credit" to 5% from 6%; remained unchanged on "municipal" securities, and decreased "government-related" exposure to -4% from -3%.

Bill Gross on PIMCO's negative "government-related" exposure using swaps, and the end of QE2:
"That to some extent speaks to a durational statement, to the extent that you're selling swaps and basically reducing the duration of your portfolio."
"We simply suggest that since the Fed has been purchasing 70% to 75% of all the Treasuries that have been offered over the past year to year and half, that it's a legitimate question of who will buy them and at what yield. We simply think that treasury yields have been artificially repressed not only by QE1 and QE2 but by the policy rate."
"The Federal Reserve of New York has estimated perhaps 50 to 100 basis points of under-yielding, over-priced valuation from these programs in combination."
"We think 10-year treasuries will be higher in yield. Now they're around 3.18%; we suspect still that 4% is a beginning level of attraction going forward."

Language will dominate Fed policy after QE2 (June 30):
"If the Fed continues to suggest that unemployment is a priority and inflation is contained, then you can expect Fed funds to stay at twenty-five basis points, and that's a very significant anchor for 2s, 5s and even for 10s. So follow the policy language going forward. Expect QE2 to end and that QE3 probably will take the form of language instead of actual purchases going forward."

For more commentary read Bill Gross's May 2011 Investment Outlook "The Caine Mutiny (Part 2)".
  • Low policy rates and the increasing negative real yields that they engender as inflation accelerates represent an immediate threat to investment portfolios.
  • Bond prices don’t necessarily have to go down for savers to get skunked during a process of “debt liquidation.”
  • PIMCO advocates a renewed vigilance, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies." [read more]

However, Bill Gross said all bets are off if there is recession risk. From Reuters on 5/6/2011:
"PIMCO's Bill Gross, who runs the world's largest bond fund, said on Friday the only way he would reverse his "short" position on U.S. government-related bonds and purchase Treasuries again is if the United States heads into another recession."

Source: Bloomberg

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