By Hao Li: Subscribe to Hao's RSS feed
October 27, 2010 6:11 PM EDT
Bill Gross, who runs PIMCO's Total Return Fund, the world's largest mutual fund, is bearish on U.S. Treasuries.
The Federal Reserve is likely to announce a second round of large quantitative easing in early November.
Gross said quantitative easing, in the current environment and policy framework, is temporarily bullish for Treasuries but ultimately bearish for them.
Follow us
It's temporarily bullish simply because the Fed plans to be a large buyer of them and bid up their prices. However, at some point, the rally will reach a "dead-end where…prices can no longer go up," said Gross.
That's because Treasuries are loans, and higher prices means lower borrowing costs; at some point, prices can go no higher because the borrowing cost becomes close to zero. When this happens, the value of Treasuries will erode through inflation, said Gross.
Gross, using an analogy of turkeys trying to avoid being served "on a platter" on Thanksgiving, said PIMCO intends to "run faster than the [other turkeys]" and cut Treasury holdings before the above-mentioned scenario happens.
However, he said even in that environment, PIMCO still has ways of making money.
He suggested debt from emerging markets offering higher yield and non-dollar denomination and high- quality corporate debt of multinational corporations as possible investment options.
From a big picture perspective, Gross said the second round of quantitative easing will "likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and...equity managers to adjust to a new environment."
Email Hao Li in New York at hao.li@IBTimes.com.
To report problems or to leave feedback about this article, e-mail:
To contact the editor, e-mail:
We value your privacy. Your email address will not be shared.
