PIMCO Dumps U.S. Government-Related Holdings

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ROBERT SIEGEL, host:

Big news in the bond market: PIMCO, the world's biggest bond investor, has sold off all the U.S. government-related holdings in its biggest mutual fund. That is the PIMCO Total Return Fund. It holds over $200 billion in securities. As recently as January, 12 percent of that was in U.S. government holdings. And now, it's evidently down to zero.

Bill Gross, who founded PIMCO, joins us now from Newport Beach, California.

Welcome to the program once again.

Mr. BILL GROSS (Founder, PIMCO): Thank you very much.

SIEGEL: And in a nutshell, why? Why sell off all that federal debt?

Mr. GROSS: Treasury bonds, basically as a group, yield about 2 percent, and it simply seems to us at PIMCO, that based upon expectations for inflation and for the real economy going forward, that a 2 percent reward is not appropriate relative to the risk being taken.

SIEGEL: There was just a bond auction I saw, and the Treasury sold $21 billion in 10-year notes for what I gather was a good price, over 3 percent. Are you going against the grain here? Or do you think you're out in front of a trend? Which would you say?

Mr. GROSS: Well, it seems like for the last few days - you're very observant. Yesterday, the 10-year auction did go very well at three and a half percent. So, obviously, somebody wants them. Having said that, you know, a contrarian investor at times at least is rewarded for their contrariness, and so we'll stick to it at least for a while.

SIEGEL: There've been many Cassandras recently saying that the Treasury - some time in the future - may have real trouble finding people to continue lending to us. Right now, you're not going to do that. Do you believe there's going to come a time when everyone will make the same judgment you're making? It's not worth lending to the United States of America anymore.

Mr. GROSS: Well, everyone won't make the judgment at the same time, but there certainly are problems that the Treasury have. They have a debt ceiling deadline in the next few weeks that may or may not be broached, and they have increasing levels of debt to GDP, which place them in the category of a double A type of nation moving towards single A.

SIEGEL: So you're describing risks there. You're describing doubts that you have about Treasury paper.

Mr. GROSS: Oh, I think so. The doubt is primarily that a 2 percent average yield for Treasury debt is far below historical comparisons, and that an investor - a bond investor - should look to corporate debt or to other countries which offer higher interest rates.

SIEGEL: Which raises the question: If your mutual fund has moved $25 billion out of U.S. government-related holdings, where is it going?

Mr. GROSS: To a number of areas, to corporate debt. Municipal debt to some extent. Yields, they are very attractive at six and half to 7 percent, not without some risks. And we have moved into other countries: Mexico, Brazil. You know, even countries such as Italy offer premiums relative to U.S. Treasury that are historic in comparison.

SIEGEL: If the Federal Reserve's practice of quantitative easing, QE2 as they say...

Mr. GROSS: Yes.

SIEGEL: ...if it ends in a couple of months or at the end of June, what would you expect to happen next? Would you expect to start seeing substantially higher yields on federal bills? And would you be back into U.S. government-held debt at that time?

Mr. GROSS: Sure, of course. If it's a question of the interest rate and if interest rates went up - which would be my expectation - then certainly we've got nothing against Treasury debt other than the yield that they offer.

Up until this point, the Federal Reserve has been the primary buyer of these Treasury auctions to the tune of a trillion and a half dollars, where basically the Fed has been matching the U.S. deficit - one hand feeding the other. When they disappear or if they disappear at the end of June, then, you know, that does call into question who's going to fill the hole? And I suspect the hole has to be filled with, yes, the PIMCOs of the world and foreign buyers, but buyers that are attracted by a higher interest rate as opposed to a current interest rate.

SIEGEL: Mr. Gross, thank you very much for talking with us today.

Mr. GROSS: You're welcome. Thank you for having me.

SIEGEL: Bill Gross of PIMCO, speaking to us from Newport Beach, California. PIMCO, which operates the world's largest mutual fund, has gotten rid of all of the U.S. government-related holdings in it. That used to be 12 percent of the fund as recently as January.

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