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Monday, April 11, 2011

Who is Bill Gross and What is He Telling Investors?

When I was a kid in North Carolina, the pool lifeguard would end our "sharks in the water" game with a big "everybody out of the pool " proclamation. It was mainly to give the life guards a chance to catch their breath and the adults a little stress-free swim time. It turns out it was also advance training for navigating investment markets.

Bill Gross, manager of world's biggest bond fund at PIMCO, has cut government linked debt to a negative percentage of his Total Return Fund's $236 billion portfolio and is publicly renouncing Treasuries as an investment choice. This is his "everybody out of the pool" statement. Cash equivalents now comprise 31% of portfolio assets, up from 23%, the highest percentage in 4 years.

Gross is concerned about the impact of the Federal Reserve ending its QE 2 Treasury buying program. He asked, “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?”

This is an important week in this unfolding drama due to some important inflation data being reported as well as Treasury auctions taking place. On the inflation front, the market will get CPI , PPI , and import price reports. The core rate of the CPI (ex food & energy) is expected at 0.2% (roughly 2.4% annual rate). Above that and it could spook the market.

The key auctions will take place on Wednesday and Thursday. On Wednesday, the Treasury auctions 10-year notes and on Thursday the 30-year bond. How these auctions go depends a lot on investor's inflation outlook.

This is all playing out with the ongoing budget talks and looming debt ceiling issues adding a bit of spice. It's not hard imagining a perfect storm brewing.


  1. I don't think Gross is alone in taking these types of steps. Some of the best minds in the bond markets are doing similar things. Anyone who goes to the grocery store or the gas pump knows inflation is here in just about everything but housing prices and technology. There is only one direction for the interest rate to go on US Government debt-- the thirty year bull market in bonds is just about over. In fact, Gross has sought approval from the shareholders of his fund to begin buying preferred stock in addition to bonds to increase yield and perhaps slightly decrease interest rate sensitivity.

  2. I've been following this drama as well! It is going to be an interesting week!

  3. I couple years ago, I thought betting against the long bond was a good move, not a sure thing but with rates as low as they were, it seemed to make sense. Of course, the Fed's actions make the timing of that trade tenuous. So this will be a week to watch closely