World’s largest bond fund to discontinue holding government debt

Will Rahn Senior Editor
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In the wake of the US government projecting record budget deficits, Bill Gross, the man who runs the world’s biggest bond fund, has eliminated all government-related debt from his flagship fund, Bloomberg news reports.

Gross’ Pacific Investment Management Company, also known as Pimco, removed all the government-related debt from the $237 billion Total Return Fund last month. Gross believes “Yields on Treasuries may be too low to sustain demand for government debt” as the Federal Reserve continues its policy of “quantitative easing” — a process of printing more money to allow the Fed to purchase financial assets and government bonds.

According to Gross, “Nearly 70 percent of the annualized issuance since the beginning of QE2 [second round of quantitative easing] has been purchased by the Fed, with the balance absorbed by those old standbys — the Chinese, Japanese and other reserve surplus sovereigns.”

“Who will buy Treasuries when the Fed doesn’t?” Gross asked last week in a company newsletter. “Not me.”

“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,” Gross continued. A basis point is 1 percent of a single percentage point.

Gross also said that Pimco may buy more treasuries if yields rise to more attractive levels.