Tags: Pimco | Gross | Treasury | Rally

Pimco’s Gross: Treasury Rally Quickly Coming to An End

Tuesday, 15 May 2012 01:45 PM

Treasury bonds have performed well in recent years but their rally is quickly coming to an end, says Bill Gross, founder of Pimco, manager of the world's largest bond fund.

The U.S. lost its coveted AAA rating in 2011, when the country raised its debt ceiling at the last minute and narrowly avoided a default.

Plus yields have run into negative territory in real terms thanks to loose monetary policies.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Investors worldwide have long fled to dollar-denominated Treasury bonds during times of volatility, but dismal returns may end that trend.

“With the U.S. suffering a credit downgrade to AA+ and offering negative 200 basis point policy rates for the privilege of investing in Treasury bills, the willingness of creditors — as opposed to debtors — to support the existing system may soon fade,” Gross writes in a Financial Times piece.

“With dollar reserves widely dispersed in China, Japan, Brazil, and other surplus nations, it is fair to assume that there will come a point where 2 percent negative real interest rates fail to compensate for the advantages heretofore gained in buying sovereign bonds," Gross adds.

The Federal Reserve has slashed interest rates to near zero and has snapped up $2.3 trillion worth of bonds from banks in two rounds of quantitative easing, widely referred to as QE1 and QE2.

Quantitative easing aims to push long-term interest rates down even lower when traditional cuts to benchmark interest rates fail to spur enough recovery.

On top of quantitative easing — dubbed by critics as printing money out of thin air — the Fed has also reshuffled its Treasury portfolio by selling short-term instruments and stocking up on longer-dated bonds to even further push longer-term borrowing costs down.

Corporate bonds, meanwhile, have become more attractive recently.

Investors withdrew a net $5.7 billion from U.S. stock funds in April, industry consultant Strategic Insight reports, according to the Associated Press.

A lot of that money went into high-quality corporate debt as investors fled from volatile equities markets roiled by the European debt crisis.

"The fragile state of investor confidence will benefit bond fund inflows in the near future," says Avi Nachmany, research director at Strategic Insight, the AP adds.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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