Pimco chief investment officer Bill Gross says interest rates are heading higher and healthcare reform will cost us big time.
"No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer as asserted by Democrats and in fact the Congressional Budget Office," writes Gross in a note to investors.
And, as a November IMF staff position note pointed out, "high fiscal deficits and higher outstanding debt lead to higher real interest rates and ultimately higher inflation, both trends which are bond market unfriendly," Gross notes.
In addition to the 10 percent of GDP deficits and a growing stock of outstanding debt, U.S. investors must be concerned with future unfunded entitlement commitments, "which portfolio managers almost always neglect, viewing them as so far off in the future that they don’t matter," Gross says.
"Should it concern an investor in 30-year Treasuries that the Congressional Budget Office estimates that the present value of unfunded future social insurance expenditures (Social Security and Medicare primarily) was $46 trillion as of 2009, a sum four times its current outstanding debt?" Gross asks.
"Of course it should, and that may be a primary reason" why 30-year bonds yield about 4.7 percent whereas 2-year debt with the same guarantee yields about 1 percent, he says.
Brian Edmonds, head of interest rates at Cantor Fitzgerald & Co., said the Treasury market is having a delayed reaction to the $940 billion healthcare overhaul bill.
"The idea is that idea that another big spending program means more borrowing by the U.S. Treasury, that we're going to continue to see massive amounts of supply in Treasury-land," Edmonds told The Wall Street Journal.
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