Buffet Bets Against US Treasuries

Posted on Thursday, 31st March 2011 @ 05:34 AM by Text Size A | A | A

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Bill Gross Says Treasuries Have Little Value, Echoing Buffett

By Wes Goodman – Mar 30, 2011

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Treasuries “have little value” because of the growing U.S. debt burden.

The U.S. has unrecorded debt of $75 trillion, or close to 500 percent of gross domestic product, counting what it owes on its bonds plus obligations for Social Security, Medicare and Medicaid, Gross wrote in his monthly investment outlook. The U.S. will experience inflation, currency devaluation and low-to- negative interest rates after accounting for consumer-price gains if it doesn’t reform its entitlement programs, he said.

Pimco “has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” Gross wrote in the report published on Newport Beach, California-based company’s website. Congress “must make ‘debt’ a four-letter word.”

The comment echoes Warren Buffett, the billionaire investor who recommended avoiding long-term fixed-income bets in U.S. dollars because the currency’s purchasing power will drop. Treasuries have handed investors a 0.1 percent loss this quarter, adding to a 2.7 percent decline in the final three months of 2010, based on Bank of America Merrill Lynch data.

President Barack Obama’s government has increased the U.S. publicly traded debt to a record $9.05 trillion, leading Gross to compare the nation to Greece, which had its credit ratings cut two steps by Standard & Poor’s on March 29.

“We are out-Greeking the Greeks,” he wrote.

Inflation Risk

Gross said in an interview March 11 that he eliminated government-related debt from his Total Return Fund because investors aren’t being adequately compensated for the risk of quickening inflation.

Buffett has shortened the maturities of Omaha, Nebraska- based Berkshire Hathaway Inc.’s bond holdings as the Federal Reserve eased monetary policy to stimulate the economy, according to regulatory filings.

“I would recommend against buying long-term fixed-dollar investments,” Buffett, chairman and chief executive officer of Berkshire, said March 25 in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”

Treasuries were little changed today, with benchmark 10- year notes yielding 3.45 percent as of 12:26 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The 3.625 percent note maturing in February 2021 traded at 101 15/32.

The Fed said in November it would pump $600 billion into the U.S. economy by purchasing Treasuries to sustain the economic expansion.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, has widened to 2.46 percentage points from 1.82 percentage points six months ago. The 10-year average is 2.0 percentage points.

Treasury 10-year notes pay 1.34 percent after subtracting consumer-price increases, the so-called real yield. That’s down from last year’s high of 2.39 percent in December.

Pimco’s record $236.9 billion Total Return Fund gained 7 percent in the past year, beating 82 percent of its competitors, according to data compiled by Bloomberg. The company is a unit of insurer Allianz SE (ALV) in Munich.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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