Tags: Gross | Treasurys | important | insurance

Pimco's Gross: Treasurys Represent Necessary ‘Insurance’

By    |   Monday, 09 Jul 2012 02:45 PM

It’s important for bond investors to hold some Treasurys now as “insurance,” despite their unattractive yields, says Bill Gross, co-chief investment officer at Pimco.

The 10-year yield recently registered close to 1.5 percent. And with inflation totaling 1.7 percent for the year through May, that means a negative real return.

But anytime risk has increased in financial markets during the past 3 ½ years, Treasury prices have surged as investors sought a haven.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Gross himself was famously burned last year, when he dumped all the Treasurys from Pimco Total Return, the world’s biggest bond fund, only to see the bonds rally sharply.

“They [Treasurys] are insurance,” he tells The New York Times. “That insurance has become more expensive now, but on a day when you need that insurance, you’re glad to have it.”

Bond investors face a quandary. To earn a decent return they must reach out far in terms of maturity and risk. But interest rates will eventually rise, and when they do, the riskiest, longest-term bonds will fall the furthest.

“It’s a delicate walk, like Mr. Wallenda on the wire over Niagara Falls,” Gross says.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

Still, as long as the U.S. economy remains sluggish, Treasurys are likely to stay strong.

“There’s still a great deal of pessimism about the strength of any recovery,” Aaron Kohli, an interest-rate strategist at BNP Paribas, tells Bloomberg. “People still believe the malaise in the global economy is much greater than most policy makers realize.”

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Monday, 09 Jul 2012 02:45 PM
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