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PIMCO Dumps all its US Government Bonds

Blog Oct 31, 2011

Who is Bill Gross?

The question seems simple perhaps, but the answer is not. If you read to the end of this paragraph, you will remember who Bill Gross is, and you may find yourself telling your Husband or Wife or a friend or family member who Bill Gross is and what was said yesterday. If you are less fortunate perhaps a year or so from now someone will tell you who Bill Gross is and what was quietly announced on March 9th of 2011, and you will wonder why you didn’t hear about it in the news or on the radio. Bill Gross is the Founder of Pacific Investment Management Company. While this may not impress you or ring any bells let me clarify further; Pacific Investment Management Company is more often seen or discussed as PIMCO. If PIMCO kind of rings a bell, check your 401K Bond selections. Bill Gross is the World’s Largest Bond Investor, and his PIMCO Total Return Fund is the World’s Largest Mutual Fund. Chances are if you are in the Bond Market inside of a 401K, Bill Gross has spent more time thinking about your money in this market than you have.

But what did Bill do you ask? Well, Bill tried to save your neck from the chopping block or keep your bacon out of the fire; however you want to look at it. Bill Gross, whose funds held $28.6 BILLION in United States Government Related Securities, (Read Treasury Bills) sold all $28.6 Billion worth. Think about this for a minute. He didn’t sell All of his Bonds, he sold all of his United States Government Bonds! Bill Gross leaving the T-Bill Market could be compared to Dracula fleeing Transylvania or Shamu packing up and running away from Sea World – there has to be a really good reason. What does Bill know that we don’t? Nothing really. But Bill doesn’t make the big bucks for just knowing things; he makes the big bucks for knowing the Right things at the Right time. Let’s look at some of the things Bill is seeing right now.

The United States Federal Reserve Bank is now the Largest Holder of United States Treasury Bills. There used to be a time when Japan or China held this title. These days China and Japan literally cannot loan the United States the money it needs fast enough to finance our debt and the interest on the debt. The Federal Reserve agreed under QE2 to purchase $600 Billion in U.S. Treasuries, but this program is set to end in June of 2011. Once this program ends, Mr. Gross has concerns that there will be a sharp drop in the value of the U.S. Treasury Bond. Recently China and Japan have reduced their U.S. Bond Purchases at the Treasury Auctions, skipped the T-Bill Auctions all together or worse yet, sold some of their holdings back! Bond Investors are really creditors, and when they don’t believe the borrower can repay, they stop lending. Bill no longer allows PIMCO to lend your money to the United States Government.

Bill also understands the inverse relationship between bond rates and discounts. While this relationship is a little tricky to grasp, anyone who ever enters the bond market should take the time to thoroughly understand it, but here is a really quick synopsis: Imagine trying to sell your old bonds that pay 3% interest when the new bonds are paying 9% interest. Your old bonds pay 3% because the rates set by the Federal Reserve were really low at the time you purchased them. Now rates are higher and bonds must pay more. Mr. Gross knows that the Fed currently has rates set around .25% and that they can really only head in one direction – higher.

Another incoming but fast moving blip on Mr. Gross’s radar would have to be the emerging SDR and SDR denominated bonds. If you have not heard of the SDR, please look it up after you finish reading the next two sentences. When these bonds become available who knows what the shape of the U.S. Dollar will be or what the U.S. Balance Sheet will look like, but look for Countries, Corporations, and individuals to be diversifying out of U.S. Dollar denominated T-Bills and into the more well-defined SDR. Also look for Mr. Gross, if he is in his usual spot, you will find him ahead of the curve.


Sources & References In This Article

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