Wednesday, March 9, 2011

PIMCO's Total Return Fund (PTTAX) - the World's Largest Bond Fund - Dumps All U.S. Government Related Debt

Wow, quite a bombshell out of PIMCO's Bill Gross.  Apparently ahead of the end of QE2 he has simply dumped anything U.S. government related out of PIMCO Total Return.  This would indicate he believes everything in the market has been manipulated mispriced due to the Federal Reserve programs, and we're going to see some fireworks in the coming months.   Somehow I think behind the scenes the banking 'big boys' are going to help scratch the Fed's back, in return for all the gifts the Fed has handed to them the past few years, and we're not going to see any major dislocations in the bond market.  But we'll see.  If for some reason Gross is correct, there are going to be some very surprised (and unhappy) bond holders who thought they were in 'risk less' U.S. Treasuries, in the coming months.

Via Reuters:
  • The world's largest bond fund dumped all of its U.S. government debt in the biggest signal yet of how negative investors have become about the U.S. Treasury market. The move by Bill Gross's $236.9 billion PIMCO Total Return fund comes..... just days after he questioned who will buy Treasuries once the Federal Reserve halts its latest round of bond purchases in June.
  • Bond prices have come under severe selling pressure because of a strengthening U.S. economy and as investors brace for what could happen when the U.S. central bank ends its controversial quantitative easing program
  • Last week, Gross told Reuters Insider that a 4.0 percent yield for 10-year notes is a "rational expectation" if the Fed "disappears as the buyer of last resort," Gross said.
  • Pacific Investment Management Co's Total Return fund sold all its U.S. government-related securities, including U.S. Treasuries and agency debt, a source familiar with the fund's holdings said on Wednesday.
  • "It's certainly an important signal in the sense that they are allocating away from Treasuries in favor of a higher spread product," said Christian Cooper, head of U.S. dollar derivatives trading at Jefferies & Co.
  • Government-related securities include Treasuries, Treasury Inflation-Protected Securities, agencies, interest rate swaps, Treasury futures and options, and corporate securities guaranteed by the U.S. Federal Deposit Insurance Corp.
  • Gross, who also helps oversee more than $1.1 trillion as PIMCO's co-chief investment officer, has often railed against U.S. deficit spending and its inflationary impact. He has advocated buying bonds with "safe," higher yields -- such as emerging-market bonds -- that can withstand possible erosion of returns by inflation.
  • The Total Return fund's cash holdings surged to $54.5 billion as of February 28 from $11.9 billion at the end of January.  Cash is defined as anything that has a duration -- a bond's sensitivity to interest rate fluctuations -- of less than 1 year.
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