Bill Gross of Pacific Investment Management Co. said U.S. lawmakers “don't get” the long-term implications of deficit reduction even if a resolution is reached to lift the debt ceiling.
“The U.S. basically has a $60 trillion net present value liability burden, and that constitutes Medicare, Medicaid and
Social Security in combination,” Gross, manager of the world's biggest bond fund, said on Bloomberg Television's “Surveillance Midday” during an interview with Tom Keene. ‘It certainly exceeds those liabilities in Greece or Portugal or Spain. Ultimately the U.S. has a big, big problem.”
Lawmakers need to take a gradual approach to cutting the deficit, as suggested yesterday by
Federal Reserve Chairman Ben S. Bernanke, and address the longer-term liabilities, Gross said. U.S. House Republicans plan a vote next week on a measure to cut spending, cap expenditures and condition a $2.4 trillion increase in the debt ceiling on passage of a constitutional amendment to balance the budget that will likely fail in the Democratic-controlled Senate. The Treasury has said it risks default after Aug. 2 if an extension isn't granted on the nation's $14.3 trillion debt limit.
“You can't cut two or three trillion of spending over a year or two and expect the economy to survive.” Gross said from Pimco's headquarters in Newport Beach, Calif.
A compromise that cuts less than $4 trillion of spending is likely to push yields on 30-year Treasuries higher, Gross said. A smaller package of savings would suggest “the deficit really not solved and so the long end gets hurt based on inflationary expectations and demand going forward,” Gross said.
Total Return Fund
A $1.5 trillion package would amount to a “fake it till you make it type proposition,” Gross said. “To the extent we don't get a $4 trillion package, it's the long-end that gets hurt the most.”
The 30-year yield rose 1 basis point to 4.26 percent at 1:42 p.m. in New York, according to Bloomberg Bond Trader prices. The 4.375 percent note due May 2041 fell 3/32, or 94 cents per $1,000 face amount, to 101 29/16.
Gross boosted his $243 billion Total Return Fund's investment in U.S. government securities to 8 percent of assets in June from 5 percent in May, according to a report this week on Pimco's website. Bonds in developed markets outside the U.S. rose to 13 percent of holdings from 10 percent. Cash and equivalents dropped to 29 percent from 35 percent.
More Treasuries
Pimco, which has been criticized for missing this year's rally in Treasuries, revised how it listed asset holdings last month to show that its flagship fund held U.S. government debt. In an interview on CNBC this week, Gross said he bought two- to three-year notes since U.S. bills are returning close to zero and the purchases shouldn't be viewed as endorsement of the Treasury market.
Holdings in the category now classified as government- Treasury were previously known as government and government- related debt. The category of swaps and liquid rates added last month was unchanged at minus 9 percent.
The Total Return Fund handed investors a 6.23 percent gain in the past year, beating 71 percent of its peers, according to data compiled by Bloomberg. The one-month return is 0.44 percent, outpacing 28 percent of its competitors.
--Bloomberg News--
