Tags: Pimco | Gross | Cash | World | Biggest Bond Fund

Pimco's Gross Boosts Cash, Trims Treasuries in Top Fund

By Dan Weil   |   Friday, 18 Dec 2009 04:06 PM

There is a saying in financial market that “cash is king.”

Pimco’s Bill Gross obviously agrees.

The Superstar bond-fund manager lifted cash holdings in Pimco’s Total Return Fund, the world’s biggest bond fund, to 7 percent of assets in November, the highest level he has held since Lehman Brothers collapsed in 2008, according to Pimco’s Web site.

The position is a reversal from a negative 7 percent cash holding in October.

A negative cash holding can be created by shorting money-market instruments or through the use of derivatives.

While Gross was boosting cash, he was cutting Treasuries and other government securities to 51 percent of the fund’s portfolio from a five-year high of 63 percent in October.

Gross also reduced his mortgage securities allocation to 12 percent, the lowest since Pimco’s figures started in 2000, Bloomberg reports. That represents a decline from 16 percent in October.

The reason for Gross’ move is clear.

“Almost all assets appear to be overvalued on a long-term basis,” he wrote in his November investment outlook.

The U.S. bond market as a whole, including mortgage and investment grade corporate bonds, yields 3.5 percent, Gross explains.

“To get more than that, high yield, distressed mortgages, and stocks beckon the investor increasingly beguiled by hopes of a V-shaped recovery and ‘old normal’ market standards,” he says.

And the prospects for that?

“Not likely, and the risks outweigh the rewards at this point,” Gross maintains.

“Investors must recognize that if assets appreciate with nominal GDP, a 4 to 5 percent return is about all they can expect even with abnormally low policy rates.”

That means the recent ascent in a variety of financial markets — from stocks to junk bonds — is over, Gross says.

“Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets — while still continuously supported by Fed and Treasury policymakers — is likely at its pinnacle. Out, out, brief candle.”

Gross isn’t the only one who sees bonds stagnating.

“Yields will rise next year,” Tsutomu Komiya, an investment manager at Daiwa Asset Management, told Bloomberg.

“The U.S. economy will recover, and there is a possibility of a rate hike.”

And it’s not just bonds: stocks are in trouble too, many experts say.

The stock market needs to fall about 20 percent to reach fair value, says David Rosenberg, chief economist at Gluskin Sheff & Associates.

“We’re in a form of depression," he told CNBC.

"Depressions . . . typically happen after a prolonged period of credit excess morphs into a collapse, and you get asset deflation. We had asset deflation, and we had a contraction in private-sector credit." 

Meanwhile, Albert Edwards, an analyst and strategist with Societe Generale SA, has said U.S. stocks are heading for a fall to below their lows of last March.

“Deep down even the fiercest equity bulls must surely be doubting themselves,” said Edwards, according to a recent report in Bloomberg.

“We will surely see much pain to come,” said Edwards, referring to equity prices for the next two years.

“Recession will quickly follow recovery. Thinking the unthinkable has paid off in the last decade and should continue to do so.”

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There is a saying in financial market that cash is king. Pimco s Bill Gross obviously agrees. The Superstar bond-fund manager lifted cash holdings in Pimco s Total Return Fund, the world s biggest bond fund, to 7 percent of assets in November, the highest level he has...
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