Pimco Goes Negative on U.S. Debt
By MIN ZENG
NEW YORK—Bill Gross, founder and co-chief investment officer of Pacific Investment Management Co., has turned more bearish on the U.S. government-related bonds including Treasurys, reflecting his growing worries over the country's fiscal deficit and debt burden.
After February's dumping all such holdings in Pimco's $235.98 billion Total Return Fund, the world's biggest bond fund, Mr. Gross in March placed bets wagering on further price declines in these type of securities, known as shorts in financial markets. That pushed holdings of U.S. government-related debt weighted by market value down to negative 3% by the end of March compared to zero in February and 12% in January, according to data available on the company's website on Sunday.
Mr. Gross's investment strategy is widely followed by global investors not only because of his fund's size, but his impressive record of returns. The fund has outperformed the benchmark index—the Barclays Capital US Aggregate Bond Index—over the past decade.
The exit of one of the world's smartest investors out of the U.S. government-bond market is likely to add to market anxiety as concern rises that Treasury bonds' yields could rise significantly once the Fed, so far the biggest buyer of the market, steps aside in coming months.
Because the 10-year Treasury yield, which traded at 3.583% late Friday, is a benchmark to set a wide variety of borrowing costs for U.S. consumers and businesses such as mortgage rates, a much higher yield would raise borrowing costs at a time when the U.S. economy is still healing from the 2008 major financial crisis.
A rise in yields that move inversely to bonds' prices also increases borrowing costs for the U.S. government, which has been running a fiscal deficit of over $1 trillion annually over the past two years. A last-minute deal to cut spending by lawmakers on Friday averted a shutdown of the federal government, but a big focus in coming weeks is whether Democrats and Republicans can reach a common ground to raise the $14.29 trillion debt ceiling, so the Treasury Department can continue to issue new debt to pay interest and roll over maturing debt.
In his April market outlook, Mr. Gross said he sees little value in the Treasury market given the nation's mounting debt burden. In addition to the $9.1 trillion in federal debt seen on the books, Mr. Gross is worried about the hefty portion of each year's budget that goes toward non-discretionary and entitlement spending. Including obligations for Medicare, Medicaid and Social Security, the "true but unrecorded" U.S. debt is $75 trillion, Mr. Gross said, which amounts to near 500% of gross domestic product.
"[I have] been selling Treasuries because they have little value within the context of a $75 trillion total debt burden," Mr. Gross said in his outlook published on Pimco's website. "Unless entitlements are substantially reformed, I am confident that this country will default on its debt," but "not in conventional ways."
Cash was the new flavor for Mr. Gross as he boosted holdings of cash and its equivalent to 31% by the end of March, up from 23% in February and 5% in January in the fund. The holdings of mortgage-backed securities were reduced to 28% by the end of March from 34% in February and 42% in January.
U.S. government-related holdings in the Total Return Fund included nominal Treasurys, Treasury Inflation-Protected Securities, agency bonds and Treasury futures and options. Pimco—a unit of Allianz SE—is one of the world's biggest asset-management firms with more than $1 trillion of assets under management.
Mark Porterfield, Pimco's spokesman, didn't immediately respond to questions regarding the data. Financial blog Zero Hedge reported the data earlier on Sunday.
So far this year through Friday, the fund has handed investors a return of 1.48%, compared to a return of 0.12% from the index, according to data from fund tracker Morningstar. The fund has handed investors a return of 8.55% over the past five years, compared to 6.03% from the index.
Write to Min Zeng at email@example.com