“Who will buy Treasuries when the Fed doesn’t?” Bill Gross asked last week in his monthly missive. Yesterday the co-founder and chief investment officer of Pimco answered, by saying “not me.”
Pimco, the world’s largest bond fund, sold off all its government-related debt from its flagship fund.
“Nearly 70 percent of the annualized issuance since the beginning of QE2 [second round of quantitative easing] has been purchased by the Fed, with the balance absorbed by those old standbys — the Chinese, Japanese and other reserve surplus sovereigns,” Gross said of the recent bond action.
He also cited extreme embezzler Bernie Madoff in his letter, likening the Fed debt buying to a Ponzi scheme, which works until it doesn’t.
Pimco’s $237 billion Total Return Fund cut its Uncle Sam debt holdings to 12 percent of assets in January, according to the Newport Beach, Calif., company’s Web site. The fund’s net cash position surged from 5 percent to 23 percent.
Some bond traders say this action and talk about European Central Bank raising rates at its next meeting in April as being the canaries in the coal mine for any further action by the Fed after QE2.
“Yields on Treasuries may be too low to sustain demand for US 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 Web site on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to more 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,” Gross wrote. A basis point is one-hundredth of a percentage point.
The Fed is scheduled to complete its purchases of $600 billion of Treasuries in June. Gross said investors should look at the end of June as if it were D-Day, since both bond and equity markets have been artificially inflated by Fed chief Ben Bernanke’s money-printing.