PIMCO's Gross: 'Buy Cheap Bonds With Safe Spread'

(June 3, 2011) — Pacific Investment Management Co.’s (PIMCO) Gross, the manager of the world’s largest bond fund, is pushing investors to shun duration risk and look toward “cheap” bonds in other segments of the market.

“Investors should focus on ‘safe spread’, which means buying more floating and fewer fixed rate notes,” he says in the report. “They should buy into additional credit components such as investment grade, high yield, non-agency mortgage or emerging market related debt, and shade their portfolio in the direction of non-dollar emerging market currencies.”

Meanwhile, Gross discourages the idea of buying into Treasuries. “Prices are near the boiling point with the Fed, the Chinese and the banks all buying up whatever treasury bonds are offered. With coupons near subzero, CPI adjusted, total return is jeopardized, or if not it is certainly trapped in a future low return kettle of water,” he writes.

In a radio interview on Bloomberg, Gross also says the Federal Reserve is unlikely to do a third round of quantitative easing, despite slowing job growth. “We don’t see a QE3. There has been too much discussion and dissent within the Fed to permit that type of program,” Gross says in the interview. “…They will speak to a fed funds rate that persists for an extended period of time, which in effect caps interest rates in the process,” he asserts, reiterating that he isn’t buying Treasuries for his $243 billion Total Return Fund. 

Gross’s departure from Treasuries has been widely reported. Earlier this year, his $237 billion Total Return Fund said it would hold no government debt for the first time in over two years while also cutting its exposure to mortgage-backed securities from 42% to 34% of holdings. Instead, the fund is upping its exposure to emerging-market debt to roughly 10% of its total assets. In a recent report, Gross wrote that investors in Treasuries are being ‘shortchanged’ and are ‘abdicating their responsibility’. According to Gross, the current high inflationary environment presents immediate threats to portfolios as Treasuries are set to be “overvalued for decades,” even following the end of the Federal Reserve’s QE2 stimulus this month.