Bill Gross has long been considered one of the top financial analysts of our time.  He runs Pacific Investment Management Company (PIMCO), the world’s largest mutual fund, and is considered by many to be the “king of bonds.”  What is significant is that his company dumped all of its US government bonds! The Total Return Fund (PTTRX) went from $28.6 billion to zero!

His reasoning, in an interview with NPR, “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.”

Later in the interview he says that the Federal Reserve has been buying all of the US Treasuries lately to the tune of $1.5 trillion which is funding the deficit and that when QE2 is over that someone will need to fill the hole.  He believes at that point rates will need to rise in order to compensate for the risk being taken by investors.

If you read his investment outlook posted on his site in January of this year you will see that he has great concern for what the Fed and the US Government are doing.  He sees that perpetual trillion dollar deficits will create massive pain in the future.  He sites four issues that will occur:

1.    American wages will lag behind CPI and commodity price gains
2.    Dollar depreciation will sap the purchasing power of U.S. consumers, as well as the global valuation of dollar denominated assets
3.    One of the consequences of perpetual trillion dollar deficits is the need to finance them, and at attractively low interest rates for as long as possible
4.    Trillion dollar annual deficits add up, and eventually produce a stock of debt that can become unmanageable

I think when speaking to NPR he was being polite by saying that he would buy US Treasuries again if the rates rise, especially when he says the things above.  He also stated when it comes to investment strategies that it is important to have “currency exposure other than the dollar.” One way to diversify from the dollar is to buy gold coins.

I believe that PIMCO and Bill Gross are concerned with the US Dollar and the strategies of the US Government and Fed and are diversifying away the risk.  Actions speak loudly, and dumping all US Government Bonds from your portfolio makes a pretty loud point.