--Gross worries Fed policy will hurt long-dated Treasurys
--Gross also favors TIPS to hedge inflation risks
--Gross: Chances of Fed selling back long-dated Treasury holdings slim
By Min Zeng
It turns out that "Bond King" Bill Gross's interest in Treasury bonds
is very selective.
Mr. Gross, founder and co-chief investment officer at Pacific
Investment Management Co., favors Treasury bonds maturing between five
years and seven years while shunning the benchmark 10-year notes and
30-year bonds.
The preference suggests Mr. Gross desires exposure to a market that's
still proving a hideout from the euro zone's unresolved debt crisis
and a slowing global economy, but that he continues to worry about
long-term inflation risks.
The fund manger, whose $270 billion Total Return Fund is the largest
bond fund in the world, has long worried that the Federal Reserve's
unconventional monetary stimulus will eventually stoke inflation and
that this will eat into the real return on long-term bonds.
"At three trillion dollars, the Fed's balance sheet can only go higher
in my opinion, which in turn is inflationary," Mr. Gross said in an
email response to questions Tuesday afternoon. "That is why thirty-
and ten-year Treasurys should be sold in favor of safer
five-to-seven-year maturities."
Mr. Gross said this strategy doesn't mean he has shifted his stance on
Treasury bonds. Rather, he is "just affirming the consequences" of
quantitative easing measures--including the Fed's purchases of
longer-dated Treasury bonds--following the 2008 global financial
crisis.
In contrast to some other big bond fund managers who have snubbed
Treasury bonds completely this year, Mr. Gross had Treasury bonds as
33% of the Total Return Fund's holding at the end of July. Even though
the share slipped from 35% in June, that's still the second-largest
allocation for the bond fund after mortgage-backed securities.
Still, Mr. Gross's latest comments signal that he could pull out of
the Treasury bond market if conditions change.
In recent months, he has dubbed Treasury bonds the "cleanest of the
dirty shirts," fretting that the market could get hit if the U.S.
fails to come up with a credible plan to bring down its long-term
fiscal deficits.
And in the investment outlook that he published earlier this month,
Mr. Gross aired his fears about the Fed's impact on inflation and the
threat it poses to long-term Treasury bonds.
In Twitter messages Tuesday, Mr. Gross wrote that "the Fed is where
bad bonds go to die," and "Today it was 10-years. Tomorrow 30-years.
Stay short my friends."
In his email message Tuesday, Mr. Gross said he believes the Fed would
let its Treasury bond holdings mature rather than selling them back to
markets, as many expect it to do.
"The Fed buys bonds that other holders don't want at current yield
levels," said Mr. Gross. "Otherwise they wouldn't sell them."
He declared that those bonds in the Fed's hands "basically have
breathed their last breath" as far as the market and "realists" at the
Fed are concerned. "The market will never see them again," he added.
Besides being selective on regular Treasury bonds, Mr. Gross said he
has invested "substantially" in Treasury inflation-protected
securities, or TIPS, which allow him to hedge against inflation risks.
Outside the U.S., Mr. Gross said his top three favorites are bonds
sold by Mexico, Canada and Brazil.
So far, the heavy concentration in high-quality U.S. assets has paid off.
Mr. Gross's fund has returned 7% this year through Tuesday, beating
91% of comparable bond funds and outperforming the 3.1% return on the
benchmark Barclays Capital US Aggregate Bond Index.
Over the past 15 years, the fund has handed investors an annualized
return of 7.4%, compared with 6.2% on the benchmark index.
Pimco, part of Allianz SE (ALV.XE, ALIZF), is one of the world's
biggest asset-management companies, with more than $1.7 trillion in
assets under management.
Write to Min Zeng at min.zeng@dowjones.com
(END) Dow Jones Newswires
August 15, 2012 14:01 ET (18:01 GMT)
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