Why Pimco liquidated all of their US Treasury holdings and why stocks, bonds and housing will all go down in 2011

Bill Gross, who runs his bond fund like a fiscal conservative but talks like a tax and spend liberal has eliminated treasuries from their flagship Total Return Bond Fund.  He has been hinting at this for some time as he has complained of the low yields on today's treasuries.

Pimco’s Total Return fund boasts $237 billion of assets. Gross had cut the holdings to 12 percent of assets in January when the fund’s net cash-and-equivalent position surged from 5 percent to 23 percent in February, the highest since May 2008.  Right now they are holding a big position in cash, which doesn't make much worse returns than the Treasury anyway.  The ultra low yields are forcing people into other investments, particularly in the emerging markets.  Via Pimco:
What I would point out is that Treasury yields are perhaps 150 basis points or 1½% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%.
He had been signalling this strategy for some time.  In February he wrote, via Pimco:
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.
In his most recent announcement he wrote why the US is totally screwed from a treasury investors perspective.  When the Fed reverses their $75 BB in monthly bond purchases, what happens to yield?  Who buys and where do mortgage rates go?

The effects will send the stock market and bond market down, the housing market will also tank another 10%.  Gross describes it as a Madoff-type Ponzi scheme which works, of course, until it doesn't.  See the chart below.  Via Pimco:
Washington, Main Street – and importantly from an investment perspective – Wall Street await the outcome. Because QE has affected not only interest rates but stock prices and all risk spreads, the withdrawal of nearly $1.5 trillion in annualized check writing may have dramatic consequences in the reverse direction. To visualize the gaping hole that the Fed’s void might have, PIMCO has produced a set of three pie charts that attempt to point out (1) who owns what percentage of the existing stock of Treasuries, (2) who has been buying the annual supply (which closely parallels the Federal deficit) and (3) who might step up to the plate if and when the Fed and its QE bat are retired. The sequential charts 1, 2 and 3 are illuminating, but not necessarily comforting.

What an unbiased observer must admit is that most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks are in the (40%) minority. More striking, however, is the evidence in Chart 2 which points out that nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns. Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?


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