PIMCO's pullout from US Treasury Bonds: a harbinger of inflation, low/negative interest rates & currency devaluation?
Further to our earlier post Bill pops Ben's Bubble, we now read Bill Gross' April Investment Outlook which states http://www.pimco.com/Pages/Skunked.aspx:
- Medicare, Medicaid and Social Security now account for 44% of total federal spending and are steadily rising.
- Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden.
- Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.
This indicates the reason behind PIMCO's February pullout. It's a significant vote of no confidence in Bernanke's policy of quantitative easing, due to conclude in June 2011. He's not alone.
Famed investor Warren Buffett joined the discussion recently when he said in a speech in New Delhi that investors should stay away from long term fixed-dollar investments because of his forecast for weakness in the U.S. dollar. Apparently Mr. Buffett is also reducing his long exposure to the long bond market and focusing on what he seems to love to do best, which is buying companies around the world. http://www.marketwatch.com/story/what-do-bill-and-warren-know-that-we-dont-2011-04-04?reflink=MW_news_stmp
Bill Gross said Treasuries “have little value” because of the growing U.S. debt burden.
PIMCO “has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” Gross wrote in the report published on Newport Beach, California-based company’s website. Congress “must make ‘debt’ a four-letter word.”
PIMCO reckons the Fed has been responsible for 70% of recent Treasury purchases, with foreigners buying the other 30%. “Who will buy Treasuries when the Fed doesn’t?” asks Mr Gross, adding that the danger is of a spike in bond yields as private investors demand a higher return to compensate them for the risks of inflation or dollar depreciation. http://www.economist.com/node/18396156?story_id=18396156&fsrc=rss
PIMCO “has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” Gross wrote in the report published on Newport Beach, California-based company’s website. Congress “must make ‘debt’ a four-letter word.”
PIMCO reckons the Fed has been responsible for 70% of recent Treasury purchases, with foreigners buying the other 30%. “Who will buy Treasuries when the Fed doesn’t?” asks Mr Gross, adding that the danger is of a spike in bond yields as private investors demand a higher return to compensate them for the risks of inflation or dollar depreciation. http://www.economist.com/node/18396156?story_id=18396156&fsrc=rss
Which leads to the question - what will happen when the current round of Quantitative Easing finishes? In what circumstances would investors be most keen to buy more government bonds? When the economy is struggling. But central banks will be highly unlikely to reverse QE at that stage. In any case, cynics suspect the problem with QE is that there may never be a moment when central banks feel confident enough to unwind it. After all, American GDP grew by a respectable 2.8% last year and growth of more than 3% is forecast for this year. Yet the mid-March Fed policy meeting indicated that the second round of QE would still be completed: as noted in The Economist piece "Stopping quantitative easing may be harder than starting it" referenced above.
The real point to Gross' observations of the domestic budgetary issues in the US is the reality of inflation, currency devaluation and low to negative real interest rates: that is why PIMCO has got out of bonds.
