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Pimco: Put Money Only in Few Bonds, Euro Zone

By    |   Friday, 08 Jan 2010 04:33 PM

The strong rallies that took place in an array of financial markets last year are unlikely to continue, says bond investment superstar Bill Gross of Pimco.

That’s because the Fed will soon begin to withdraw its massive stimulus, which provided fuel for much of the market moves.

“While we may not have much of a vote between political parties, in the investment world, we do have a choice of airlines, and some of those national planes may have elevated their bond and other asset markets on the wings of central bank check-writing over the past 12 months,” Gross writes in a commentary on Pimco’s Web site.

“Downdrafts and discipline lie ahead for governments and investor portfolios alike.”

Investors will move their money to bond markets where governments are fiscally responsible, Gross says.

"Additionally, if exit strategies proceed as planned, all U.S. and U.K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009,” he wrote.

That monetary stimulus is what boosted financial markets since March, Gross says.

“If so, then most ‘carry’ trades in credit, duration, and currency space may be at risk in the first half of 2010, as the markets readjust to the absence of their ‘sugar daddy,’” he wrote.

“Market returns may not be so fine in 2010.”

The easier terms available for issuers in the bond market has raised concerns that a bubble may be brewing there.

“Investors are beginning to let their guard down and consider some riskier structures in the credit markets,” Scott Minerd, chief investment officer at Guggenheim Partners, told Bloomberg.

At Pimco, “With corporate bonds, we are becoming a bit more cautious than we have been,” Paul McCulley, a managing director at the firm wrote in a commentary on its Web site.

“We are currently cutting back in the U.S. and U.K. (bond markets), because . . . supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines.”

To be sure, Pimco isn’t bearish on all U.S. corporate bonds.

“We see value in carefully selected high-quality credits, particularly in bank and non-bank financials and non-cyclical sectors, such as utilities and health care,” McCulley wrote.

“In high yield corporate, we are adding very select names in telecoms and energy pipelines that we view as ‘money good.’”

Pimco favors Treasury Inflation-Protected Securities (TIPS) for the long term, McCulley says.

But the firm is underweight TIPS for the short term, because it sees more risk of disinflation now than inflation.

Pimco also is bullish on bonds in the euro zone, because governments there haven’t embarked on huge deficit spending like their brethren in the United States and United Kingdom, McCulley writes.

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The strong rallies that took place in an array of financial markets last year are unlikely to continue, says bond investment superstar Bill Gross of Pimco. That s because the Fed will soon begin to withdraw its massive stimulus, which provided fuel for much of the market...
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2010-33-08
Friday, 08 Jan 2010 04:33 PM
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