Monday, April 13, 2009

the bond market will figure out that a U.S. government guarantee works equally well on agency bonds as it would on Treasuries.

TO BE NOTED: From Fundmastery Blog:

"Pimco Adds to Government Bond Position

Kurt Brouwer April 13th, 2009

Bill Gross and his Pimco Total Return Bond Fund as loading up on government agency bonds such as Fannie Mae and Freddie Mac bonds. These agency securities carry an explicit guarantee from the U.S. Treasury. This Bloomberg piece gives a bit more detail:

Gross Raises U.S. Debt Holdings to Highest Level Since 2007 (Bloomberg, April 13, 2009, Dakin Campbell)

Bill Gross, manager of Pacific Investment Management Co.’s $144 billion Total Return Fund, increased his holdings of U.S. government debt to 28 percent in March, the highest percentage in almost two years.

Pimco’s founder and co-chief investment officer boosted government debt holdings from 15 percent in February to the most since April 2007, according to the Newport Beach, California- based company’s Web site. The world’s biggest bond fund’s holdings of mortgage-backed securities dropped to 66 percent of total assets from 86 percent in February.

…While the government debt category includes Treasuries, Gross has said that Pimco is not interested in buying the securities. In February, Gross said that while the Fed should buy Treasuries he would not follow its lead.

…The Total Return Fund rose 4.8 percent in 2008, beating 93 percent of its peers, data compiled by Bloomberg show. The fund has returned 1.5 percent this year through March, according to Pimco data.

In January, Gross held a negative position in government debt securities such as Treasuries, debt issued by government-backed agencies such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank system or interest-rate derivatives.

The argument for agency (Fannie Mae, Freddie Mac etc.) mortgage-backed securities is that they have far higher yields than Treasury bonds with comparable maturities, yet both are backed by the U.S. government. Presumably, the Pimco brain trust believes the bond market will figure out that a U.S. government guarantee works equally well on agency bonds as it would on Treasuries.

See also Pimco Predicts Inflation Ahead and

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