In his latest just released monthly letter, Bill Gross continues to explain why those expecting a cover of PIMCO's short treasury exposure will be disappointed for at least one more month: "Although we have warned for several years of the deteriorating creditworthiness of America’s AAA rating, our de minimis Treasury positions had less to do with much more immediate issues than America’s balance sheet prospects. We are highly sensitive to the pocket-picking policies that governments in general deploy to right the ship." This time the symbol for the US (and global) economy, and specifically artificially low interest rates is a "tanker" analogy: " While the global financial tanker was on automatic pilot, we had changed course well in advance and it has been relatively smooth sailing since." Needless to say, Gross is convinced said ship is on a collision course. Ergo the title of this month's piece: "The Caine Mutiny." As usual, it is the 'Treserve' that is at fault for doing everything in its power (selling treasury puts?) to keep rates artificially low, a move which Pimco not surprisingly not in favor of: "holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility." Yet Gross does not advocate an outright mutiny, but renewed vigilance: "PIMCO advocates not so much a mutiny but a renewed vigilance on this new ship, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies." Bottom line: "The Treasury market is on a collision course with financial repression and it is time to adjust your rudder to starboard to get home safely." Undoubtedly the usual response will be that Gross is just being unjustly alarmist. That is, until he is proven 100% correct.
- Low policy rates and the increasing negative real yields that they engender as inflation accelerates represent an immediate threat to investment portfolios.
- Bond prices don’t necessarily have to go down for savers to get skunked during a process of “debt liquidation.”
- PIMCO advocates a renewed vigilance, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies.