UPDATE 3-Bill Gross goes short in bet against the U.S.

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  • Posted on April 12, 2011


    Budget deal avoids shutdown, fight aheadSat, Apr 9 2011With no budget deal, government shutdown loomsFri, Apr 8 2011Crude oil surges above $126, dollar slumpsFri, Apr 8 2011WRAPUP 11-U.S. Congress races clock for budget dealThu, Apr 7 2011As boomers age, a soul-searching budget battleThu, Apr 7 2011 Analysis & Opinion The carry trade never dies Muni sweeps Related Topics Stocks » Bonds News » Bonds » Global Markets » Funds News » ETFs News » Financials » Stocks

    Mon Apr 11, 2011 5:05pm EDT

    * Gross shorts US government debt, raises cash to $73 bln

    * No confidence in Fed policy, ‘mindless’ deficit spending

    * Investors share Gross’ sentiments; short bonds (Recasts, new throughout; adds byline)

    By Al Yoon and Jennifer Ablan

    NEW YORK, April 11 (Reuters) – Bond King Bill Gross is shorting America.

    The fund manager who runs the world’s largest bond fund has raised the stakes on his bet U.S. government debt prices will drop because he expects interest rates to climb, the dollar to fall and the United States to lose its AAA rating.

    After selling all of the U.S. government debt holdings held by his $236 billion Total Return fund (PTTRX.O) at PIMCO in February, Gross ratcheted up his bearishness last month by taking a short position, according to PIMCO’s website.

    Gross is not only betting against the government’s ability to get the U.S. budget deficit and debt burden under control, but also giving the Federal Reserve’s ultra easy monetary policy a vote of no confidence.

    In particular, he has said he fears the day the Fed’s $600 billion Treasury purchasing program ends, as it will leave the U.S. bond market vulnerable to a severe sell-off.

    “We have a show-down brewing between the biggest bond fund manager and the Fed,” wrote Richard Gilhooly, director of rates strategy at TD Securities.

    Gross, who helps oversee $1.2 trillion in investments as PIMCO’s co-chief investment officer, has also repeatedly warned against “mindless” U.S. deficit spending and its inflationary impact, which undermine the value of government debt and push up yields as investors demand more compensation for risk.

    Over the last six months, worries about the ballooning U.S. budget gap, estimated at $1.645 trillion for 2011, and inflationary fears have played a big role in the steep sell-off in Treasuries.

    Compounding the severe selling pressure, investors last week contended with a near-shutdown of the government and the possibility of the United States hitting its $14.3 trillion debt ceiling on May 16.

    The yield on the benchmark 10-year Treasury note, which moves inversely to price, has risen more than one percentage point since early October, to 3.58 percent on Monday.

    In his latest investment letter to clients, Gross said the U.S. government is “out-Greeking the Greeks, dear reader” — a reference to Greece’s outsized government debt that forced the country into a bailout.

    “We are smelling $1 trillion deficits as far as the nose can sniff” if the government fails to address the biggest entitlement programs including Medicare, Medicaid and Social Security, he added.

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    Budget deal avoids shutdown, fight aheadSat, Apr 9 2011With no budget deal, government shutdown loomsFri, Apr 8 2011Crude oil surges above $126, dollar slumpsFri, Apr 8 2011WRAPUP 11-U.S. Congress races clock for budget dealThu, Apr 7 2011As boomers age, a soul-searching budget battleThu, Apr 7 2011 Analysis & Opinion The carry trade never dies Muni sweeps Related Topics Stocks » Bonds News » Bonds » Global Markets » Funds News » ETFs News » Financials » Stocks

    Mon Apr 11, 2011 5:05pm EDT

    BOND VOYAGE

    In a sign of how ever more bearish Gross has become, exposure in his Total Return fund’s long-term U.S. government debt holdings, including U.S. Treasuries, declined to “minus 3″ percent in March from zero in February and 12 percent in January. That values his short bet at about $7 billion.

    What’s more, the fund now holds a third of its assets in cash and cash equivalent — a staggering $73 billion. That is up from cash and cash equivalent holdings of 23 percent as of Feb. 28, from 11 percent at the end of January.

    “The Fed is … trying to hold long rates down and the minus 3 percent in Treasuries is taking the other side of that bet,” TD Securities’ Gilhooly said.

    Gross’ extreme call against the U.S. government because of its worsening budget deficit and debt problem is also reflected in his fund’s holding of debt issued by Brazil, Spain and other foreign governments.

    PIMCO’s move echoes a broader dislike of U.S. Treasuries among investors.

    Speculators went net short on Treasuries for the first time in six weeks as of April 5, according to the latest data from the Commodity Futures Trading Commission. In a short position, an investor sells a borrowed security on a bet it can buy it back later at a lower price.

    Some ETFs that bet against the Treasury market also have seen a jump in volume lately. Volume in the ProShares Short 20+ year Treasury (TBF.P), which shorts the Barclays Capital U.S. 20+ Year Treasury Bond Index, last Thursday had its most active session since Feb. 24.

    Gross’ big moves are taking place as investors pull money from PIMCO’s Total Return Fund, which registered $1.59 billion of outflows last month, according to Lipper. That was the fifth straight month of outflows, the longest streak of net redemptions since Lipper began tracking the data in 2004, totaling $18.05 billion of withdrawals from the fund since November.

    Like other bond managers, PIMCO attracted huge net inflows in the wake of the global financial crisis. But with economic growth strengthening, the outflow that began in November has led to reallocation into other sectors, including stocks and commodities like gold.

    The Total Return Fund has returned 1.48 percent this year, putting it in the top 22 percent of similar funds as cataloged by Morningstar. But it has lagged major U.S. stock indexes. (Additional reporting by Richard Leong, Karen Brettell and Daniel Burns in New York, and Kevin Plumberg in Singapore; Editing by Dan Grebler)

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    Reuters/AC



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