September 29th, 2009 by AdvisorAnalyst

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Bloomberg reports that PIMCO’s Bill Gross is exchanging his corporate bonds for longer-dated government securities out of concern for deflation. This is a theme that we have written extensively about during the course of the year.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he’s been buying longer maturity Treasuries in recent weeks amid a re-emergence of deflation concern.

“We’ve exchanged our mortgages for the government’s check” as the Federal Reserve winds down purchases of agency debt, Gross said in an interview from Newport Beach, California, with Bloomberg Radio.

Gross boosted the $177.5 billion Total Return Fund’s investment in government-related bonds to 44 percent of assets, the most since August 2004, from 25 percent in July, according data released earlier this month on Pimco’s Web site. The fund cut mortgage debt to 38 percent from 47 percent.

This is very interesting if you’ve been following Bill Gross’ calls during the course of the year. Late last year and early this year, Gross was a huge investor in corporate debt, particular the debt of financials that received support from the government in the form of guarantees. Gross’ main thesis was and continues to be “Shake hands with the Government.” By the way, corporate debt has outperformed its equity peers during the course of the year, and was considered by many large investors as the superior bet given the option to invest in equities. The strategy of buying corporate debt (which was regarded as a lower risk than equities earlier this year) is one that eluded most retail investors because the credit market is generally perceived as out of reach or sophisticated.

Much of the “easy” money has already been made in corporate debt, and its likely now that investors, who are still for the most part sitting in record levels of cash, may stay there, or be lured into the equity market by the powerful rally seen the last two quarters.

If, on the other hand if you’re in the same camp as Gross, that deflation is still something to worry about, then longer dated governments may be the way to go. In Gross’ “New Normal” de-leveraging, de-globalization, and re-regulation are three dominant themes that flatten out the yield curve, which remains steep, and a flattening yield curve means short term rates rise while long term rates fall. The short term rates will be a little while in rising as it may be a little premature for the Fed to touch them, but the long term rates will come down as the market continues down the deleveraging path Gross and a few others are counting on, as assets get substituted for cash on institutional balance sheets. For the large institutions who continue to target their balance sheets, this ‘recovered’ equity market is a perfect opportunity to sell some reflated assets, and that means that a large amount of cash will be used to retire debt  and/or refinance Option ARM mortgages for that matter.

Long term rates are likely to fall on this development.

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Comments

One Response to “Bill Gross Investing in Long-Dated Treasuries”

1. Fred Says:
   October 2nd, 2009 at 1:45 pm

   Adrienne Penake, who writes for Finance Banter, works to make the sophisticated market of corporate bonds accessible to the everyday investor. Check out her stuff here – http://bit.ly/T6vVe

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