Gross Increasingly Cautious About MBS, Big Fan Of Canadian Bonds And Economy
An increasingly cautious Bill Gross joins his yet more pessimistic colleague El-Erian, in noting that disruptions to the MBS market may be severe post March 31, primarily as a function of concerted liquidity withdrawal by not just the Fed, but central banks across the globe. Not surprisingly, Gross would like to see a very small investment by Germany in its Greek bailout so as not to impair PIMCO's existent Bund holdings. Yet Gross is sounding surprisingly timid on future German sovereign debt prospects, which has now been singled out as the least of all evils (hardly the most glowing endorsement) except for Canada. Is PIMCO now hoarding not just Brazilian, Polish, Russian and German bonds, but aggressively acquiring Canadian treasuries as well? Rosenberg will be happy.
Gross does not believe Lacker's posturing that the Fed will dispose of assets any time soon.
There is going to be enough pressure on rates simply by stopping the purchasing of mortgages at the end of this month. The selling of them would put substantial pressure.
On global QE:
The additional factor to consider is that other central bankers, the BOE, the ECB and even the BOJ are all pulling back in terms of their QE measures at almost the same time. Together they have provided $2-$2.5 trillion worth of purchasing power to replace what's disappeared in terms of the shadow banking system. We should all be concerned. This is really the first step in terms of tightening, not monetary tightening, but tightening in terms of credit and so we need to wait for 3 to 6 months to see what the effect is not only on interest rates but on economic growth going forward.
Gross' observations on European bailouts, and his response whether recent developments make him more apprehensive about his German bet:
"I think it does. We would prefer to see a lower bailout as opposed to a higher bailout. The number mentioned this morning has been in the €5 billion category for Germany alone, but the extend to which individual countries' balance sheets are contaminated by guarantees and extensions of credit yes, that leads to questions in terms of sovereign viability down the road. The U.S. has a substantial portion of its own balance sheet contaminated by agencies, Fannie and Freddie and the like going forward, so Germany is not alone. Canada is probably in the best shape in terms of all those guarantees and contingencies. PIMCO and the rest of the world can't all buy Canadian government bonds, but it's a start."
What Gross will do now in Germany after his recent vocal endorsement of Bunds. He surely does not sound too enthusiastic any more.
What we would do in Germany is basically buy the front end of those yield curves that are predicated upon the potential for the ECB to raise rates. We think that that's certainly not the case. They won't lower rates, but simply keeping the rate at 1% should lend support to the front end of those yield curves.
And lastly, as a follow up to his earlier letter:
Sovereign bonds are moving to the credit space. It means that Greece, six month ago, where an investor in the sovereign space would have been dependant on interest rate changes and monetary policy, is now dependant more on the creditworthiness of the country. So there is a morphing, there is a transition between interest rate space into more credit space, where the viability of the country's at stake.
Full Bloomberg TV clip: