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Bill Gross buying Treasuries

By Sheyna Steiner · Bankrate.com
Tuesday, August 30, 2011
Posted: 4 pm ET

Being mistaken can be embarrassing but it's always better to admit the mistake, cut your losses and move on.

And Bill Gross is moving on from his recent mistake: his well-known estrangement from longer-term U.S. Treasuries.

Earlier this year the co-chief investment officer of Pimco and manager of the Pimco Total Return Fund, announced that he was tossing Treasury bonds out of the world's largest mutual fund.

Gross was somewhat skeptical about quantitative easing in both the first and second iterations. Back in March he penned one of his monthly Investment Outlook newsletters in which he posed the question: Who will buy Treasuries when the Fed doesn't?

What an unbiased observer must admit is that most of the publicly issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys -- the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes' "three yards and a cloud of dust" in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who's to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until ... until ... well, until it isn't. Because like at the end of a typical chain letter, the legitimate corollary question is -- Who will buy Treasuries when the Fed doesn't?

(Emphasis his.)

Specifically, Gross predicted that bond prices would fall following the end of the Fed's Treasury-buying program, QE2. As prices fell, long-term bondholders would find themselves stuck with expensive, low-yielding investments.

Obviously, that has not happened. Not only has there been no shortage of buyers for U.S. government debt, the 10-year Treasury yield was 2.18 percent on August 29.

On June 30, as the Fed wrapped up QE2, the 10-year Treasury yield was 3.18 percent.

Bond prices move inversely to yield. High demand drives up prices and pushes yields down.

In an interview with Financial Times published Tuesday on FT.com, Gross admitted that he thought the economy would be doing better.

"I get that it was my/our mistake in thinking that the US economy can chug along at 2 percent real growth rates. It doesn’t look like it can," Gross said in the Financial Times story, "Pimco's Gross regrets 'mistake' on U.S. debt call."

“It’s not necessarily a flip flop, as we don’t own tons of Treasurys, but its a recognition that the US and developed economies are near the recessionary dividing point," he said.

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2 Comments
Sheyna Steiner
September 01, 2011 at 9:57 am

That's a good point Matt.

Unfortunately timing is everything, as they say. Timing the market is tough for everyone, even Bill Gross.

Matt
September 01, 2011 at 9:51 am

I personally don't think he was wrong but as the old saying goes, the market can remain irrational longer than you can remain solvent. It's only a matter of time before rates go up and treasury values go down.