Bondholders are getting 'skunked' by Fed, Gross says

A federal funds target at virtually 0% poses an immediate threat to bondholders amid rising inflation and negative real yields, according to Bill Gross, who runs the world's biggest mutual fund at Pacific Investment Management Co. LLC
OCT 06, 2011
A federal funds target at virtually 0% poses an immediate threat to bondholders amid rising inflation and negative real yields, according to Bill Gross, who runs the world's biggest mutual fund at Pacific Investment Management Co. LLC. “Bond investors forced to invest in dollar government bonds, either through indexation, convention, regulatory guidelines or simply falling asleep at the helm, are being shortchanged by 1% to 2% annually, compared to historical norms, and in many cases receive negative real yields,” he wrote in a monthly investment outlook posted last week on Pimco's website. Mr. Gross, Pimco's co-chief investment officer, who is the portfolio manager of the Pimco Total Return Fund, bet against U.S. government-related debt in March and boosted cash, making it the fund's largest component. The $241 billion fund had -3% of its assets in government and government-related debt after reducing the position to zero in February, the company said last month on its website. The fund can have a negative position by using derivatives or futures, or by shorting. Cash and equivalents rose to 31% in March, from 23% in February, making the category the largest component for the first time in four years. The firm's holdings of Treasuries totaled 63% last June, the highest since October 2009, when it held the same percentage. “Although we have warned for several years of the deteriorating creditworthiness of America's [triple-A] rating, our de minimis Treasury positions had less to do with much more immediate issues than America's balance sheet prospects,” Mr. Gross wrote. The Federal Reserve has kept its target rate for overnight lending between banks at 0% to 0.25% since December 2008 and has aimed to boost economic growth through stimulus, including $600 billion of debt purchases under the second round of quantitative easing, scheduled to end next month.

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