Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said a federal funds target at virtually zero poses an immediate threat to bondholders amid rising inflation and negative real yields.
“Bond investors forced to invest in dollar government bonds either through indexation, convention, regulatory guidelines or simply falling asleep at the helm are being shortchanged by 1 percent to 2 percent annually compared to historical norms and in many cases receive negative real yields,” Gross wrote in a monthly investment outlook posted today on Pimco’s website. “There should be little doubt that simply holding Treasurys at these yield levels for an extended period of time represents an abdication of responsibility.”
Gross, 67, bet against U.S. government-related debt in March and boosted cash to be the largest of the Total Return Fund’s holdings.
Pimco’s $241 billion fund had minus 3 percent of its assets in government and related debt after reducing the position to zero in February, the Newport Beach, California, company said last month on its website. The fund can have a negative position by using derivatives or futures or by shorting.
Cash and equivalents rose to 31 percent in March from 23 percent in the prior month, making the category the largest component for the first time in four years. The firm’s holdings of Treasurys totaled 63 percent in June, the highest since October 2009, when it held the same amount.
“Although we have warned for several years of the deteriorating creditworthiness of America’s AAA rating, our de minimis Treasury positions had less to do with much more immediate issues than America’s balance-sheet prospects,” Gross wrote in the monthly commentary. “Bond prices don’t necessarily have to go down for savers to get skunked during a process of debt liquidation.”
The Federal Reserve has kept its target rate for overnight lending between banks at zero to 0.25 percent since December 2008 and has aimed to boost economic growth through stimulus including $600 billion of debt purchases under the second round of quantitative easing, scheduled to end in June.
“The argument over whether the end of QE2 on June 30 will result in higher yields and lower Treasury bond prices is, in a sense, a secondary one,” Gross wrote. “Even if 10-year Treasurys stay where they are at 3.30 percent, and fed funds close to zero, savers and financial intermediaries are being shortchanged by both of these yields and everything in between.”
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