Who will buy Treasuries when the Federal Reserve stops? Pimco’s Bill Gross thinks he knows the answer. The manager of the world’s biggest bond fund has cut its holdings of US government-related debt, including Treasuries, to zero.
The reason for this is Mr Gross’s belief that Treasury prices will fall when the Fed ends its huge bond-buying programme, known as quantitative easing and designed to avoid a deflationary trap.
Not illogically, Pimco is betting that, with the Fed out of the picture, yields on Treasury bonds will rise – hitting the prices of bonds which move in the opposite direction. Investors loaded with debt will see the value of their holdings fall.
Pimco is not the only bond bear. Other investors are wary of the risks once the Fed stops buying, which it is expected to do in June. They have poured $500m of new money into exchange-traded funds that should profit when US yields rise.
Indeed, this debate has been brewing for months. The longer-term threat of inflation, assuming the US recovery gathers pace, is another well-flagged risk for bond investors.
Still, Mr Gross’s move is a big statement and follows recent comments by Fed officials suggesting QE2 would not be extended beyond June.
The central bank, buying about $100bn of bonds a month, has accumulated $419bn of government debt since November, taking its Treasury holdings to $1,230bn. Already the biggest holder of Treasuries, it is expected to own $1,600bn by the end of June.
Read more: FT.com / Capital Markets - Pimco stirs up debate over US Treasury bonds
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