Sovereign debt bubble thread

[MadImmortalMan]

Might as well have one for these little nuggets.



http://www.bloomberg.com/news/2011-03-09/gross-drops-government-debt-from-pimco-s-flagship-fund-zero-hedge-reports.html

Pimco's Gross Eliminates Government Debt From Total Return Fund
By Susanne Walker - Mar 9, 2011 11:09 AM PT

Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.

Pimco's $237 billion Total Return Fund last held zero government-related debt in January 2009. Gross had cut the holdings to 12 percent of assets in January, according to the Newport Beach, California-based company's website. The fund's net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008.

Yields on Treasuries may be too low to sustain demand for U.S. government debt as the Federal Reserve approaches the end of its second round of quantitative easing, Gross wrote in a monthly investment outlook posted on Pimco's website on March 2. Gross mentioned that Pimco may be a buyer of Treasuries if yields rise to attractive levels.

Treasury yields are about 150 basis points too low when viewed on a historical context and when compared with expected nominal gross domestic product growth of 5 percent, he wrote in the commentary. The Fed is scheduled to complete purchases of $600 billion of Treasuries in June.

Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. "Old- fashioned gilts and Treasury bonds may need to be 'exorcised' from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint," Gross wrote.
Emerging-Market Debt

Gross last month increased holdings of emerging-market debt to 10 percent, the highest since October, from 9 percent in January. He cut holdings of mortgage securities to 34 percent from 42 percent in January.

The Zero Hedge website first reported the change in assets today. Pimco doesn't comment on changes in holdings.

Treasuries returned 5.9 percent in 2010, according to Bank of America Merrill Lynch Indexes. The securities lost 0.6 percent so far this year.

Ten-year Treasury yields have risen for each of the past six months, according to data compiled by Bloomberg, the longest run since June 2006, as the economy showed signs of improvement and prices of commodities climbed. The 10-year yield fell six basis points to 3.48 percent today.

Gross kept the holdings of non-U.S. developed debt at 5 percent in February.
Inflation Outlook

Gross' fund has returned 7.23 percent in the past year, beating 85 percent of its peers, according to data compiled by Bloomberg. It gained 1.39 percent over the past month.

As the Fed maintains its target rate at a record low range of zero to 0.25 percent and has made an increase in inflation a cornerstone of its monetary policy, Gross noted that inflation may be a bigger factor than many suggest.

Gains in so-called headline inflation matter more for the U.S. economy than Fed Chairman Ben S. Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on "Bloomberg Surveillance" with Tom Keene.

"Bernanke tends to think this doesn't matter -- at least in terms of headline versus the core -- we do," Gross said.

Pimco's U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the company's website. The fund can have a so-called negative position by using derivatives, futures or by shorting.

Derivatives are financial obligations whose value is derived from an underlying asset. Futures are agreements to buy or sell assets at a later specific price and date. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.24 trillion of assets as of December.

Panic or smart?

[grumbler]

I think that gross is correct that inflation will be far more of a problem than is commonly acknowledged over the next year or so.

If there were a US political party that advocated cuts across the board (including a deep cut in defense) and sensible tax increases to return to sustainable deficits, I'd vote for that party.  There is no such party, however.  I think the current US political system is destined to implement another train wreck.

[Caliga]

  I have a position in an emerging market sovereign debt ETF fund right now.

[derspiess]

I think that gross is correct that inflation will be far more of a problem than is commonly acknowledged over the next year or so.

If there were a US political party that advocated cuts across the board (including a deep cut in defense) and sensible tax increases to return to sustainable deficits, I'd vote for that party.  There is no such party, however.  I think the current US political system is destined to implement another train wreck.

How deep of a cut in defense?

Anyway, we've been down this road before but I'd go along with some sort of tax increase as long as it were combined with deep spending cuts in a serious effort to reduce the deficit.

[alfred russel]

If he was worried about an actual debt crisis in the US and UK he shouldn't be advising people to shift to more speculative debt classes: if there is a debt crisis, they are going to get creamed.

On the other hand, if you are bullish on the world economy, you probably want to cycle into more speculative debt grades as there isn't much upside room to owning US debt.

[Berkut]

If there were a US political party that advocated cuts across the board (including a deep cut in defense) and sensible tax increases to return to sustainable deficits, I'd vote for that party.  There is no such party, however.  I think the current US political system is destined to implement another train wreck.

I am as hawkish as they come (mostly) when it comes to defense spending.

I would very much like to see a SERIOUS cut in defense spending.

[DGuller]

I think inflation fears are vastly overblown, mainly because people assume that printing money always equals inflation.  They don't realize that there are more variables in play than just quantity of money.

[alfred russel]

If there were a US political party that advocated cuts across the board (including a deep cut in defense) and sensible tax increases to return to sustainable deficits, I'd vote for that party.  There is no such party, however.  I think the current US political system is destined to implement another train wreck.

I am as hawkish as they come (mostly) when it comes to defense spending.

I would very much like to see a SERIOUS cut in defense spending.

You are contradicting yourself. 

[Admiral Yi]

Heard an interview with this dude on NPR.  He also said that our Debt/GDP ratio is that of a AA country, and headed towards single A level.

[Sheilbh]

I am as hawkish as they come (mostly) when it comes to defense spending.

I would very much like to see a SERIOUS cut in defense spending.

I think the US defence budget's ridiculous - and I imagine a lot of it's corrupt.  It reminds me of Churchill's diary of a pre-war cabinet meeting.  The Admiralty wanted six dreadnoughts, the Treasury suggested four, the cabinet decided to build eight.

[The Minsky Moment]

Definitely not panic here.  The driving force from Pimco appears to be poor yield.  The point is that however one assesses the risk, the yields are too small to justify it.  Not an unreasonable conclusion.

[Richard Hakluyt]

The yields on the "safe" bonds have been very low. It seems to me that there are better bargains out there in the form of the safer equities. If those companies fail then I can't see the government paper being safe either.

[grumbler]

I think inflation fears are vastly overblown, mainly because people assume that printing money always equals inflation. 

I think that, given that your assumption about what people assume is almost certainly untrue, your conclusion is unsupported.  I don't know how anyone could conclude that "inflation fears are vastly overblown" in any case, since inflation fears are seldom even expressed.

Certainly, one could find some specific examples of inflation fears that are vastly overblown, just as one could find specific examples of overblown complacency about inflation (like "mainly because people assume that printing money always equals inflation" when people know that money is printed all the time and inflation is an intermittent problem).

[Neil]

I am as hawkish as they come (mostly) when it comes to defense spending.

I would very much like to see a SERIOUS cut in defense spending.

I think the US defence budget's ridiculous - and I imagine a lot of it's corrupt.  It reminds me of Churchill's diary of a pre-war cabinet meeting.  The Admiralty wanted six dreadnoughts, the Treasury suggested four, the cabinet decided to build eight.

That wasn't really corrupt though.  That was because of the huge public concern over national defence and the (for all practical purposes defunct) two-navy standard, stoked by the Opposition and the First Lord.

[DGuller]

I think inflation fears are vastly overblown, mainly because people assume that printing money always equals inflation. 

I think that, given that your assumption about what people assume is almost certainly untrue, your conclusion is unsupported.  I don't know how anyone could conclude that "inflation fears are vastly overblown" in any case, since inflation fears are seldom even expressed.

Certainly, one could find some specific examples of inflation fears that are vastly overblown, just as one could find specific examples of overblown complacency about inflation (like "mainly because people assume that printing money always equals inflation" when people know that money is printed all the time and inflation is an intermittent problem).

You must be lucky then.  I see fears of not just imminent inflation, but imminent hyperinflation, expressed pretty regularly.  Usually it's correlated with being a gold bug or a related nut. 

Even outside of the nutty fringe, I hear many people just assume that Bernanke's quantitative easing is a major inflationary threat.  It's impractical to perform a valid statistical tests on all the things I observe, to determine whether my observations are accurate and unbiased, so I'll just have to live with the chance that occasionally my observations are not.