Posts Tagged ‘PIMCO’
After Getting Smoked On Treasuries, Bill Gross Joins The Ranks Of Silver Market Conspiracy Theorists
Jun. 24, 2011, 12:21 PM
Despite the imminent end of QE2 — and the fact that Bernanke has made it fairly clear that QE3 is not imminent — Treasuries keep grinding higher, moving against bond god Bill Gross, who has said they’re due to tank.
Nonetheless, he’s been vocal about his belief bondholders will get screwed in various ways, and that inflation is on the march.
Now he’s even getting conspiratorial.
Here’s the latest tweet from PIMCO (which is actually probably one of the best corporate twitter feeds).
Catch that about the silver?
Back in May, when silver was literally going parabolic, the CME hiked margins on speculators. Conspiracy theorists thought this was a deliberate attempt to keep the price down, though the CME (and others) noted that the exchange has established formulas for hiking margins when volatility spikes.
We’re not interested in joining that debate right now, though we’ll just note that Bill Gross (or at least PIMCO) has thrown his lot in with the conspiracy crowd.
Read the entire article HERE.
By Jennifer Ablan
NEW YORK | Wed Jun 22, 2011 12:15pm EDT
Jackson Hole is an annual global central banking conference, led by the Fed, which takes place at Jackson Hole, Wyoming. It was at this event last year that Fed chairman Ben Bernanke said the U.S. policymakers were prepared to make a major new investment in government debt or mortgage securities if the economy worsened significantly or if the Fed detected deflation — a prolonged drop in prices of wages, goods and assets like homes and stocks.
Gross, the co-chief investment officer of PIMCO, the world’s top bond manager, on Wednesday said on Twitter: “Next Jackson Hole in August will likely hint at QE3 / interest rate caps.”
PIMCO oversees more than $1.2 trillion in assets, mostly in fixed-income. PIMCO confirmed Gross had sent the Tweet on QE3.
Last week, Gross first introduced the idea that the Fed on Wednesday could signal that interest rates could be capped if warranted due to soft economic growth.
Gross said on Twitter last week on Tuesday that: “QE3 likely to take form of ‘extended period’ language or interest rate caps on 2-3-year Treasuries.”
Gross also said on Twitter last week: “Next week’s Fed statement will likely stress ‘extended period of time’ language or even a period of interest rate caps.”
The Fed will issue its policy statement after the close of its meeting on Wednesday.
The recent soft patch of economic data has increased speculation over whether U.S. policymakers will perform a third round of bond purchases, an unconventional monetary measure known as “quantitative easing,” or QE2. The second round of QE2′s $600 billion in purchases will conclude on June 30.
Read the entire article HERE.
By: Patrick Allen
CNBC EMEA Head of News
Wednesday, 4 May 2011 | 6:13 AM ET
The Co-CEO of bond giant PIMCO, Bill Gross, has warned investors that holding US Treasury’s is an “abdication of responsibility” in his May note to investors.
“US Treasurys and the bond market in general are being ‘repressed’, ‘capped’ or simply overvalued compared to the prior 30 years,” Gross wrote.
With the Federal Reserve’s policy keeping yields low, Gross believes investors are being short-changed and that yields would be higher without the Fed’s unconventional measures.
“Bond investors forced to invest in dollar government bonds either through indexation, convention, regulatory guidelines or simply falling asleep at the helm are being short changed by one to two percent annually compared to historical norms and in many cases receive negative real yields,” he wrote.
“While that still leaves open the question of price behavior following QEII, there should be little doubt that simply holding Treasurys at these yield levels for an extended period of time represents an abdication of responsibility,” said Gross.
QEII is an abbreviation for the Fed’s second round of quantitative easing, a policy of buying assets in order to inject money in markets and thus keep interest rates low.
“Bond – and stock – investors have been sailing on the ‘Good Ship Lollipop’ for over 30 years following the Volcker revolution and the return of high real interest rates to investment markets,” he said.
“Now, however, with governments attempting to impose financial repression, bond investors should revolt,” he added.
“PIMCO advocates not so much a mutiny but a renewed vigilance on this new ship, stressing bond market safe spread alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies,” Gross said.
Read the original article HERE.
by Tyler Durden
From Peter Tchir of TF Market Advisors
To QE or not to QE, that is the question.
So here is what I expect to happen and why.
The Fed will continue to re-invest proceeds from repayments.
The Fed will use proceeds from pre-payments and redemptions to buy new assets. If they don’t purchase new assets, they are effectively tightening. Any time one of their treasuries matures, they will receive payment from the treasury. This money has to be reinvested or else the Fed will have to remove some 1’s and 0’s from somewhere in the system, effectively, unprinting money. So using the proceeds merely keeps the status quo.
As part of this, they will also announce that they tend to purchase longer dated assets with these redemption proceeds. They will argue that they want to add additional support to the long end of the curve specifically to help the mortgage market. They may even go back to purchasing mortgages and not just treasuries. The rationale of using the money to lend as much support to the mortgage market as possible is the most politically acceptable reason. An unspoken reason for extending maturities will be growing concern within the Fed that this tool will be taken away, so to ensure the most control of their balance sheet they will want to extend their portfolio and reduce roll off going forward.
I believe the market has almost completely priced this in. Any sign that they will not re-invest proceeds would be a negative for the market. I’m not sure the market is pricing in any extension out the curve or into mortgages so those could provide mild upside. I’m a little concerned that much of what I read and hear tends to view re-investment as a continuation of QE2. I don’t see it that way. Any re-investment of proceeds from a treasury redemption is merely keeping the status quo. No new money is being created nor being pumped into the system, its no different than if the Fed had originally purchased this longer dated bond.
QE3 will differ from QE2 and has only a 50/50 probability of being announced
On a basic level, the hawks within the Fed would like to pause the QE program at the end of June. The doves are far more likely to be pushing for another round, but they seem less aggressive right now. The economic data is much stronger than when QE2 was first announced, although it has been weakening of late, and the sovereign debt crisis in Europe has taken another leg down. In an ideal world for the Fed, they would allow QE2 expire in June, but talk up the potential for QE3 in the event it is needed. There are two problems with this approach. One problem is that the Fed is well aware of the growing criticism of the policy. Somewhere in the back of his mind, Ben, must be concerned that if he does not proceed with QE2 now, there will be too much pressure on the voting members to launch QE3 later. If they don’t launch QE3 in June but the data deteriorates to the point they want to launch in September, the outcry might just be too strong. The government as a whole is already against it. Certainly the argument that ‘it worked’ would be difficult to make, the reality would be that just like so many other programs is that it increased current economic activity at the expense of future economic activity. Also, since Ben is constantly trying to manage expectations, what would the market reaction be to a Fed that does not proceed with QE3 in June but tries to do it only a short while later?
So I think they might be pressured into launching a version of QE3 in June, but I think it will look very different from QE2. I expect that it would target longer dated treasuries and possibly even mortgages, in an effort to create the most political support. I also believe it will be more open ended. Rather than saying we will spend $X billion in 6 months and here is our purchase schedule and target portfolio, he will create a ‘war chest’. QE3 will be positioned as we have $X billion that we are prepared to use to purchase longer dated treasuries and mortgages if and when we see the need to add support. This would be a true compromise. It does not force the Fed to create a schedule of auctions like QE2, in fact if the data remains stable they don’t have to do anything. That should appease the hawks. By targeting maturities that directly impact mortgage rates, its more palatable to the average American, and by keeping the activity less obvious they can deflect any links to inflation more easily. It also keeps the purchases open at a time when there must be some real concern that this alternative tool could be restricted in the future.
I believe that the market is set up for some disappointment. It feels like a lot of investors are saying they don’t expect QE3 but deep down think it’s likely and are positioned for the positive surprise. Another group of investors seems convinced that no QE3 is priced in so are comfortable being long since only a positive surprise could happen. In the end, I think a full QE3 announcement is mildly positive, a version of QE3 lite as described above is a minor negative, and no QE3 would be negative for the markets.
What the interested parties are pushing for
Ultimately Ben and the board will determine whether to pursue QE3 based on its merits, but there are a lot of interested parties that are pushing their agenda and likely have some influence on the outcome. In the end, for all these reasons, believe that it is only 50% chance that QE3 is implemented, and if it is implemented it will have more flexibility than QE2 and a more concentrated effort to help mortgage rates.
Wall Street is for QE3
The QE program is great for Wall Street. They will want to see it continue. At the most basic level, the treasury is purchasing about $120 billion a month in treasuries from them. If the street is making 1/8 on each trade with the government, that is $150 million of profit for the street every month. For a product like treasuries, maybe an 1/8 is too much, but since the Fed doesn’t disclose the purchase price, just the quantity, it’s not a horrible assumption. Asides from the direct bid/offer income made from the sale, the Fed is a dream client. They are big, and tell you what they want to do. If the street isn’t able to scrape out another 1/8 or 1/4, I would be surprised. So I think we can assume that the treasury desks make another $200 million a month from trading ahead of the POMO schedule. That is over $1 billion of additional profits for the street every quarter. That is hard to give up. From the earnings announcements so far, most of Wall street had strong revenues in their fixed income departments. A part was certainly coming from corporate new issues, but with secondary volumes light across the board in corporates, it makes sense that a portion of that performance came from treasury trading related to QE2.
That $1 billion a quarter is just an estimate of the direct impact for the banks. The extra $300 billion a quarter in money the Fed is printing has helped increase asset values and likely enhanced trading revenues on other desks as the money had to go somewhere.
So Wall Street would certainly prefer to see a QE3. They would never tell the Fed these are the reasons, but its certainly in their interest to push for more QE.
New York Fed is for QE3
I am going to treat the New York Fed separately from the other Fed members. First, their district benefits the most from QE. Keeping Wall Street happy is particularly important for the New York Fed. But I also believe that they like buying $120 billion of treasuries every month. They are an important player in the market. Wall Street traders who make multiples of what they do are finally at their beck and call. Maybe its all subconscious but its hard not to believe that Dudley enjoys having Wall Street ‘need’ him. The New York Fed gains prestige and the employees enjoy the power of wielding so much money, so they have a strong bias to maintain POMO. They won’t say it, but buying bonds and dealing with the street all day, is a lot more fun than writing two year plans that no one will ever read or follow.
The Average American is against QE3
The average American cares about jobs, mortgage rates, and how much it costs to make it through a day. The ‘success’ of QE2 has always mystified them. They heard about job creation but never really knew anyone who got a job from QE2. They heard it helped mortgage rates, but most had already refinanced, or are so underwater it doesn’t matter, so they assumed it must be working. They have some stocks in their 401k, so that’s been good, but their company is threatening their pensions which is what they were really relying on anyways. Nothing they heard about QE2 seemed to match what they were experiencing, but they let it go. Suddenly the cost of making it through the day has been sky rocketing. Their paycheck is the same, but gas, coffee, and food are all getting more expensive. They are nervous about the prices they are paying for things and are starting to blame this QE thing for it. They are also doubting it really did any of the good things people said it did. This message is becoming louder and congress is hearing it loud and clear.
Foreign Governments are against QE3
Regardless of what Ben says, other countries see QE as inflationary. Regardless of Obama’s contention that speculators are pushing up the price of oil (in dollars) other countries see the QE policy as partly responsible. China and other countries closely tied to the dollar as seeing inflation as a result and are not happy. The U.S. is also not the only country experiencing minimal growth. Other countries are too and the devaluation of the dollar is not helping their recovery. Even strong countries like Germany must occasionally look up from the task of bailing out the PIGS and wonder what the consequences of a strong Euro will have on their economy down the road. We have annoyed the world before, but usually we do that when we feel that we have the moral high ground. With QE, I’m not sure that anyone can really hold their head high and argue with foreign governments that what we are doing isn’t short sighted and selfish. This would be less of a concern if we didn’t need them to buy our debt and weren’t hoping that they won’t retaliate on the trade front.
Corporations are mixed on QE3
The impact to corporations has been mixed.
The immediate impact to any company with overseas income has been positive as they translate those earnings back into weak dollars. This is good so far, but may be temporary as other countries implement policies to fight the weak dollar.
Those that can sell overseas are benefitting from the weakness in the dollar as their products are more competitive. The commodity companies are benefitting directly as prices of their selling prices spike. Companies that have relatively low costs of input (technology) are also doing well; whereas, some manufacturing companies with intensive raw material usage are seeing pressure on margins in spite of increased opportunities overseas.
So in general, corporations are slightly positive on QE as beneficiaries of the weak dollar but are growing concerned as they see margin pressure building.
The Fed is pro QE3
The Fed still feels like it is leaning towards QE3 but is being held back by fear of backlash from the average American, government, and foreign pressure. Maybe they are even a little afraid they have unleashed inflation in spite of their denials that QE2 could in any way cause inflation – it merely caused the expectation of inflation which reduced the risk of deflation and made the whole world better. If they knew for certain that they would be able to launch QE3 anytime they wanted to, they would definitely hold off, but I think they feel it would be prudent to put QE3 in place right now, even if on a limited basis, rather than having to restart the program – which could be very unpopular, and may cause us more harm then good if that flip-flopping behavior spooked the markets.
Read the entire article HERE.
Here’s the Setup for the Con of the Decade
The Con of the Decade, which I described last July, is being set up nicely.
I described The Con of the Decade last July (2010). The Con makes me a heretic in the cult religion of Hyperinflation. I consider myself an agnostic about the destruction of the U.S. dollar and hyperinflation (basically the same thing), but my idea that hyperinflation is fundamantally a political process makes me a heretic. I skimmed a few of the dozens of comments posted on Rick’s Picks and Zero Hedge after they posted one of my expositions on this dynamic, and didn’t see even one comment in favor of this perspective.
The Con is being set up right now, and the outlines are clearly visible. The Con works like this:
1. The Financial Elites/Oligarchy raked in billions in private profit from the orgy of leverage, credit expansion, fraud, embezzlement and misrepresentation of risk that resulted in the Housing Bubble.
2. The losses were transferred to the public (Federal government, i.e. The central State) or its proxy, the Federal Reserve (i.e. the central bank), via bailouts, backstops, guarantees, the Fed’s purchase of taxic assets, and an open window for the financiers to borrow billions at zero interest (ZIRP) for further speculations.
3. The Treasury now borrows $1.6 trillion every year, fully 11% of the nation’s GDP, as the Central State has replaced private demand and credit expansion with its own borrowing and spending.
4. Non-U.S. central banks have largely ceased to support this unprecedented scale of borrowing, so the Federal Reserve now buys most of the Treasury’s issuance of debt via QE2 (quantitative easing, the direct purchase of $600 billion in Treasury bonds).
5. Unlike Japan, the U.S. cannot self-fund its own government borrowing: while U.S. investors, banks and insurance companies do own a significant chunk of Treasuries, the U.S. savings rate (capital accumulation) is still abysmally low, around 4%, which is half the historical average savings rate.
This is the result of the Keynesian Cult’s One Big Idea, which is to pull demand forward and encourage borrowing and spending now by any means necessary, and thus sacrifice capital formation/saving.
So the basic outline of the Con is that private losses from the financialization of the U.S. economy were shifted to the public. Now to keep the Status Quo and Financial Plutocracy from imploding, the public is on the hook for $1.6 trillion in additional borrowing every year until Doomsday (around 2021 or so).
Having secured the backing of the Central Bank and Central State, the Plutocracy’s only problem now is that it needs a risk-free source of high-yield income. Yes, it has a trillion dollars or so sitting in bank reserves, collecting interest from the Federal Reserve; this is certainly risk-free, but the Fed’s Zero Interest Rate Policy (ZIRP) keeps the rate of return absurdly low.
Here’s where we see the Con taking shape. The ideal setup for risk-free returns is to own Treasurys that pay a high yield. The way to get higher interest rates is to first make the Treasury market supremely dependent on a central bank or single buyer: Done. That buyer is the Federal Reserve.
Next, have that buyer stop buying. Suddenly, interest rates start moving up. If you don’t believe this is possible, or part of a larger project, then please explain why PIMCO sold all its Treasuries. Duh–because interest rates are set to rise, and not by a little bit or for a brief span, but by a lot and for years.
That means holders of long-term Treasuries (and other debt) will be cremated as rates rise. (Holders of TIPS will do OK, unless the government fraudulently sets the rate of inflation well below reality. Hmm, isn’t that exactly what’s it’s already doing?)
Once long-term rates have leaped up, then start accumulating the high-yield bonds. Why would rates jump? Supply and demand: as the demand for low-yield Treasuries dries up, the supply keeps rising: every month, the Treasury has to auction tens of billions of dollars of bonds, or even hundreds of billions of dollars. There is no Plan B, the bonds must be sold, and if there are no buyers, then the yield has to rise.
Once rates have been engineered much higher, the Financial Oligarchy accumulates the high yielding bonds.
Here’s where “austerity” comes in. Once rates are so high that they’re choking the real economy, then voices arise demanding the Federal government stop borrowing and spending so much. Austerity (forced or otherwise) soon reduces the supply of bonds hitting the market and so rates decline, boosting the value of the high-yield debt.
To service the cost of all this Federal borrowing, taxes are raised on what’s left of the productive members of society.
To add insult to injury, it will become “patriotic” to “buy bonds.”
OK, let’s check the setup:
1. Treasury market now dependent on one buyer: check.
2. That buyer stops buying, pushing rates higher: no QE3. Check.
3. “Austerity” is now seen as inevitable–but not just yet: check.
What the true believers of hyperinflation and the destruction of the dollar cannot accept is that debt is an asset to the owner of that debt. In focusing solely on the advantages of inflation to borrowers, they ignore the critical fact that inflation quickly destroys the value of the asset that debt represents to the owner. And debt is a primary asset to pension funds, insurance companies, banks, and indeed the entire financial sector.
So in claiming high inflation is guaranteed, adherents are claiming that the entire financial sector will accept being wiped out, just so Mr. and Mrs. Taxpayer won’t have to pay interest on the ballooning government debt.
That’s exactly backward: the entire point is for Mr. and Mrs. Taxpayer to pay high yields on Treasury debt, owned by the Financial sector’s Oligarchs. The Con is to stripmine the public coffers, then impose higher rates and “austerity”, buy the debt with the cash plundered from the public, and then sit back and enjoy risk-free returns as taxes are raised on the remaining tax donkeys. Inexpensive Bread and Circuses (SNAP food stamps and the political theater of the two parties staging a partisan “fight to the death”) will keep the peasantry entertained and complicit.
As I concluded in the first foray into the Con:
In essence, the financial Elites would own the revenue stream of the Federal government and its taxpayers. Neat con, and the marks will never understand how “saving our financial system” led to their servitude to the very interests they bailed out.
The circle is now complete: in “saving our financial system,” the public borrowed trillions and transferred the money to private Power Elites, who then buy the public debt with the money swindled out of the taxpayer. Then the taxpayers transfer more wealth every year to the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will own the debt that was taken on to bail them out of bad private bets: this is the culmination of privatized gains, socialized risk.
In effect, it’s a Third World/colonial scam on a gigantic scale: plunder the public treasury, then buy the debt which was borrowed and transferred to your pockets. You are buying the country with money you borrowed from its taxpayers. No despot could do better.
This is the ultimate endgame of the financialization of the U.S. economy and the concentration of wealth and thus political power in the hands of those who skimmed the immense gains from that financialization.
Read the entire article HERE.
Saumil H. Parikh
Each quarter, PIMCO investment professionals from around the world gather in Newport Beach to discuss the outlook for the global economy and financial markets. In an interview, senior portfolio manager Saumil Parikh discusses PIMCO’s cyclical economic outlook for the next six to 12 months. Parikh, who leads the forums, is a managing director, generalist portfolio manager and member of PIMCO’s Investment Committee.
Parikh also comments on investment strategies that PIMCO is applying to manage risk and deliver returns amid global uncertainty and shifting growth dynamics.
Q: Could you discuss the economic recovery in the U.S. and whether PIMCO believes it will be a lasting rebound?
Parikh: I would first note that, as a baseline, PIMCO continues to foresee a multi-speed global recovery over the next few years, with advanced economies facing muted growth and unusually high unemployment, while systemically important emerging economies continue gradually to close the global income and wealth gap. This forecast is governed by more favorable initial conditions of debts and deficits in emerging markets as well as by the loss of capacity for fiscal stimulus in certain developed nations.
Having said that, there are certain cases where the cyclical outlook deviates somewhat from the secular outlook. Nowhere is this juxtaposition between the secular (three to five years) and cyclical (a year or less) more evident than in the U.S. The country is experiencing a cyclical economic rebound, but its strong durability is uncertain. While endorsing the resilience and innovation of U.S. citizens and the economy, there are concerns about the country’s ability to achieve in the short-term “escape velocity” due to the legacy of the global financial crisis and other structural headwinds.
Currently, governmental revenues are not growing fast enough to close deficits in a pro-growth manner, and the private sector continues to deleverage. As a result, the national savings rate has continued to decline as opposed to rise as is customary during a self-sustained recovery. Meanwhile, on the margin, political winds are changing and the next fiscal policy surprise could be contractionary – as opposed to the expansionary tax-cut deal of late 2010. And, further, we are concerned about the potential economic drag if oil prices remain elevated.
Bottom line: On a cyclical timeline, and also taking into account the external environment, we continue to forecast a 3.0%–3.5% real U.S. GDP growth rate for 2011, with risks tilted toward slower growth in 2012.
Q: And will the Federal Reserve extend quantitative easing?
Parikh: We do not anticipate that the Fed will add to the total quantity of Treasury purchases this year. If it were to change course, it could taper off the purchases (e.g., so instead of ending abruptly in June, the Fed starts buying less in April or May and stretches out purchases a few months beyond June).
Q: What is PIMCO’s outlook for Europe?
Parikh: The cyclical outlook for the eurozone and U.K. economies contrasts starkly with that of the U.S. Notwithstanding the favorable developments in Germany, several countries there face headwinds to growth via national austerity measures and the resulting fiscal drag over our cyclical horizon.
In our detailed forum discussion about the internal dynamics of Europe, the core economies are expected to achieve at- or above-potential economic growth due to strong initial conditions of competitiveness and a significant tailwind from emerging market external demand. Also, PIMCO sees a non-trivial probability of fat tails on both ends (positive or negative) for the European economy in 2011, depending on whether the sovereign crisis affecting Greece, Portugal and Ireland can be successfully quarantined before spreading to Spain and Italy.
Q: Turning to Japan, many of us have watched the incredible images of the events and the tragedy inflicted there. Certainly others are commenting on the humanitarian needs; perhaps you could discuss the impact on Japan’s economy and if there is hope on that front?
Parikh: The images are devastating and point to the massive calamities that have hit that country. Japan’s immediate focus is rightly on the enormous human suffering and on rescue operations, as well as containing nuclear-reactor risks.
Japan’s leaders have moved swiftly to stem fallout from the earthquake and tsunami on all fronts, including economic. Within days of the disaster, the Bank of Japan injected a record 15 trillion yen ($183 billion) into the world’s third-largest economy.
Japan’s economic growth rate will likely fall in the immediate aftermath of the natural disasters, but reconstruction activities should have a stimulative impact on growth over time. The loss of inventories and supply-chain disruptions could cause inflation to rise temporarily from very low levels.
Much will depend on the extent of the damage to Japan’s infrastructure. We are hoping for the best.
Q: Dramatic events are also sweeping the Middle East – is the region a threat to the global economic recovery?
Parikh: Certainly we are concerned that the sharp rise in global oil prices, and the threat that supply uncertainties could spur further increases, could lead to negative global growth consequences. A truly severe oil shock could shift our global GDP outlook from a soft landing to a more significant downturn with sharply stagflationary effects.
We continue, as with much of the world, to monitor and evaluate the situation closely. The risks are very asymmetric given the starting point of oil prices in 2011.
Q: Let’s shift to emerging markets. Does PIMCO still see them as drivers of global growth?
Parikh: We expect real economic growth in the major emerging economies of China, Brazil, Russia, India and Mexico to remain at a solid rate during 2011, but lower than 2010 due to fading monetary and fiscal policy tailwinds and some pockets of overheating.
In terms of composition, we see growth across the major emerging markets becoming more balanced, with less reliance on the inventory cycle as well as net trade and capital investments, and marginally more reliance on domestic final consumption as an engine for growth.
The main challenge for the major emerging economies in 2011 is managing the risk of greater overheating in the domestic economies. We judge idle capacity to be negligible and cyclical inflation and cost-push pressures on the rise to a degree that could threaten corporate profits, leading to a larger-than-expected slowdown. Once again, and similar to the U.S. outlook, the level and volatility of oil prices are a major cyclical risk to the emerging market growth outlook.
Q: What is PIMCO’s outlook on inflation and interest rates if the situation in the Middle East does not lead to a severe oil shock?
Parikh: Setting aside immediate oil shocks, we believe global inflation has cyclically troughed and we see a secular upswing in inflation, which naturally will put upward pressure on interest rates.
We see three key global factors as potentially adding to inflation over a long horizon:
* The degradation of sovereign balance sheets and the structural inflexibility of fiscal deficits.
* Emerging markets used to export disinflation to the developed world, but over the secular horizon we see them as exporting inflation.
* As populations age, they tend to save less and consume more. Demographics may thus become an inflationary force globally, though possibly this risk will be balanced somewhat by demographics in emerging nations.
In the near term, we anticipate most, though not all, global central banks are likely to err on the side of allowing inflation to rise above stated or implied targets during 2011. In the U.S., if the economic recovery sputters, the Fed could expand quantitative easing. But further deficit accommodation would pose inflation risks.
Q: Finally, could you discuss how PIMCO is applying its global outlook to its investment strategies?
Parikh: Let’s begin with inflation, which is a topic clients often ask us about, and how that applies to our investing decisions. Since we see a secular bias to global inflation, we expect fixed income yields to gradually rise; we believe the 20-plus-year secular duration tailwind that previously anchored portfolios is over.
So we have taken down duration in our strategies, moving to shorter maturity securities. For example, while we still have faith in the credit quality of U.S. Treasuries, we feel yields on longer-dated notes and bonds are likely to rise as the Federal Reserve ends its quantitative easing and investors price in growing inflation risks.
We continue to focus on attractive opportunities in other areas in the U.S. and across the globe, including foreign currencies and credits. There are lots of opportunities in this global marketplace. Finally, we are tempering our near-term enthusiasm for U.S. corporate bonds with a long-term outlook that the U.S. economy must eventually address fiscal deficits, rising rates and the potential for higher oil prices and those could all be negative factors for U.S. companies and the bonds they issue.
Read the entire article HERE.
Saumil H. Parikh
Mr. Parikh is a managing director in the Newport Beach office, generalist portfolio manager and a member of the PIMCO Investment Committee. He leads the firm’s cyclical economic forums and also serves as a member of the short-term, mortgage and global specialist portfolio management teams. Prior to joining PIMCO in 2000, Mr. Parikh was a financial economist and market strategist at UBS Warburg. He has 12 years of investment experience and holds undergraduate degrees in economics and biology from Grinnell College.
Submitted by Tyler Durden
03/18/2011 15:18 -0400
Goldman appears to be in full freak out mode today. After the bank had been positioned for a smooth, low-vol economic reflation mode, complete with long stock and short bond exposure, the recent volatility has blown up Goldman’s trades right in its face. Earlier we noted that the FX desk advised on a long EURUSD trade with a 1.50 target following the surge in FX vole. And while it is unclear if the jump in vol across all risk assets is enough to cripple the bank like it did in May 2010 when Goldman disclosed massive trading losses on its variance swap trade, the bank appears to have suffered some major damage on its treasury curve exposure following the recent tightening. As a result Francesco Garzarelli has just released a trade update, advising clients to go short the 5 Year at 1.936% with a 2.30% target and a stop at 1.80%. As usual, since that would mean Goldman is now accumulating 5 Year inventory, it appears we will soon have a rather dramatic duel between the two biggest Wall Street titans: PIMCO and Goldman, at least as pertains to their outlook on rates.
From Goldman Sachs:
Trade Update: Go Short 5-yr US Treasuries, as Yields Price Excessive Growth Damage
Escalating geopolitical risks in the Middle East and North Africa, coupled with the most recent devastating events in Japan, have pushed global bond yields considerably lower. The combination of more hawkish European central banks and greater flight-to-quality flows being channelled into the Treasury market has meant that US Treasuries have considerably outperformed their European counterparts. The 5-year sector has outperformed in this rally, despite the fact that real rates are already very low and that growth expectations matter relatively more than for longer durations.
Meanwhile, US economic data over the same period suggest a less friendly inflation-growth mix for US rates. In particular, business surveys are now consistent with GDP growth of well above 4%, while core inflation has continued to edge higher.
To be sure, we still see core inflation staying close to 1% for the foreseeable future and we expect the Fed to remain comfortable with the inflation outlook, given the very high degree of economic slack. But the fact that US rates have rallied strongly, to well below our near-term forecasts, and against the grain of recent macro data, offers a good tactical opportunity to pay rates. We recommend going short 5-yr US Treasuries at 1.936% for a potential target of 2.30% and a close below 1.80%.
Read the entire article HERE.