Bond king shorts U.S. debt


Extrait de: Bond king shorts U.S. debt, Tim Shufelt, Financial Post · Apr. 11, 2011

When Bill Gross bets big, markets tend to pay attention. So when the world’s most powerful bond fund manager dumped all U.S. treasuries last month, he amplified broader concerns about the stability of U.S. government debt.

And now, it appears, his confidence in treasuries has dropped to less than zero.

Mr. Gross, who heads up Pacific Investment Management Co., or Pimco, reduced the US$236-billion fund’s treasury holdings to -3% in March, a position achieved through derivatives, futures or short selling.

Pimco gets more bearishParamount among the forces working against the treasury market is the approaching end to QE2, the second round of quantitative easing that saw the U.S. Federal Reserve sink US$600-billion of liquidity into the system, Mr. Gross said in recent interview.

“The question remains, when the Fed stops buying treasuries, does the private sector take the baton and run the last leg of the relay race?” he said.

For investors who forecast rising yields, there is little reason to do so.

“If things are improving, why aren’t you incentivized to go to riskier assets?” said Tom Porcelli, chief U.S. economist at RBC Capital Markets. “Why aren’t you incentivized to go into equities? Why would you put money to work in an asset that’s probably going to be falling in price?”

And treasuries are almost certain to do so as yields rise in the coming months, Mr. Porcelli said. Forecasts for economic growth and inflation alone will likely force 10-year yields past the 4% mark by the end of the year, he explained.

“Fundamentally, the environment almost demands higher yields,” Mr. Porcelli said, and that’s before factoring in concerns about U.S. federal deficit, as well as the withdrawal of quantitative easing in June.

“I don’t think there’s any doubt when such a huge buyer of treasuries exits the market, that you have to see some backup in yields. The question is, to what extent. And it’s an open question still.”

Add to all that the growing negative sentiment against U.S. treasuries, as exemplified by Mr. Gross’s vote of non-confidence.

“He has no problem putting out large bets,” said Justin Hoogendoorn, managing director at BMO Capital Markets’ fixed-income U.S. group.

But there are limits to Pimco’s influence, he added. “He has a major impact and he’s a large player, but it only goes so far.”

Since Mr. Gross eliminated government debt from the Pimco Total Return Fund last month, the market has certainly been on a slide. Treasuries fell Monday, extending a three-week decline, as yields on 10-year debt rose to 3.59%.

But much of that is explained by concerns that the pace of inflation is rising, as expected to be shown in a number of government reports due to be released this week.

Additionally, there is little chance now of Mr. Gross increasing his negative position, Mr. Hoogendoorn said. “He’s got his bet on, I would say.”

Once the Fed stops purchasing treasuries and stops injecting liquidity in the system, economic growth could slow down, Mr. Hoogendoorn said. That, in turn, could result in a spike in demand for government debt.

“We could easily see a bit of a softening and a better performance in the treasury market.”