PIMCO’s Total Return to Hold Zero US Government Debt

(March 10, 2011) – The Fixed-Income Oracle has spoken again, and he is saying his firm will dump American government-related fixed-income products from its flagship fund.

Bill Gross, the leader of Pacific Investment Management Co. (PIMCo), has said that the $237 billion Total Return Fund will soon hold no government debt for the first time in over two years, according to the Wall Street Journal. It is also cutting its mortgage-backed securities from 42% to 34% of holdings. Instead, the fund is moving toward emerging-market debt, upping its holdings in this category to 10% of its total assets, the paper is reporting.

“It’s not a question of dissing the United States or questioning the credit of the United States, but simply a maturity reflection,” Gross told CNBC on Thursday. According to PIMCO’s leader, US government debt is “mispriced relative to the inflationary environment and the growth we see ahead and there are better alternatives in order to capture yield.” Describing where the capital would flow once it leaves US debt, Gross suggested that the beneficiary would be “… corporate bonds, those would be a smattering of high yield bonds and a growing proportion of emerging market debt which yields in the 5 to 6 percent category. Are these bonds as safe as Treasurys? No, they are not triple-A types of investments but they’re not overvalued based on quantitative easing procedures that we’ve seen over the past 12 months.”

As of January, 2011, the fund’s total domestic government bond holding accounted for 12% of its total assets. Yields on government debt are too low to sustain demand, the well-respected investment leader wrote. This is often attributed to the Federal Reserve’s QE2 program that has seen the purchase of more than $600 billion in government bonds – and many investors fear that when this program ends, bond prices will fall to lower levels.

PIMCO has been making much noise as of late regarding the price of government fixed-income investments. Earlier this month, in an interview with CNBC, PIMCO’s Mohammed El-Erian said that the central bank should calculate how it can exit from its multi-trillion dollar quantitative easing program, often called QE2. Echoing El-Erian’s comments, Berkshire Hathaway’s Warren Buffett said the US does not currently need an economic stimulus.