Wikinvest Wire

Pimco lightens up on U.S. debt

Friday, December 18, 2009

Investment managers at the fourth branch of the Federal Government, otherwise known as Pacific Investment Management Co. or Pimco, have reduced their exposure to government debt in anticipation of rising interest rates. This Bloomberg report has the details:

Bill Gross, who runs the world’s biggest bond fund, cut government debt holdings and boosted cash to the most since Lehman Brothers Holdings Inc. collapsed in 2008 amid increasing speculation that interest rates will rise.

Gross, who manages the $199.4 billion Total Return Fund at Pacific Investment Management Co., increased cash to 7 percent in November from negative 7 percent in October, according to Pimco’s Web site. The fund can have a so-called negative position by using derivatives, futures or by shorting. He reduced government-related securities to 51 percent from a five-year high of 63 percent in October.
Gross also cut holdings of mortgage securities to 12 percent, the lowest since Pimco’s figures started in 2000, from 16 percent, according to the Web site.

Gross told CNBC on Dec. 7 that Treasuries are overvalued compared to potential inflation.
The folks at Pimco are generally early on calls like this, but they're almost always right (remember how they pleaded for Bernanke to cut rates in 2008-2009?) all the more reason to lighten up on both Treasuries and the modern day equivalent - mortgage backed securities.

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Anonymous said...

Domestic mortgage standards are still far out of step with the rest of the civilized world. There is no overseas market for them, and no significant domestic savings.

The catch 22 is that continued printing will eventually lead to inflation/higher mortgage rates. Stopping printing will lead to higher mortgage rates, because nobody wants high default mortgage bonds. Taxpayer guarantees of these things depend upon continued borrowing from overseas to cover the high default rate. Eventually, the printing will force higher treasury rates, slowing borrowing to cover the high defaults.

High default mortgages are simply not a viable long run strategy. Mortgage standards have to equalize with the rest of the world for the system to become stable.

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