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Pimco Goes to Cash, Exits Treasurys

Bill Gross of PIMCO participates in a conference on the future of housing finance at the Treasury Department in Washington, DC.
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Bill Gross of PIMCO participates in a conference on the future of housing finance at the Treasury Department in Washington, DC.

Pimco has dumped all of its US Treasury bond exposure in its flagship Total Return Fund.

The move makes sense given Pimco chief Bill Gross's public statements that Treasurys are over-valued.

"It just gives people that follow him the bias not to bullish on the Treasury market," said Jefferies Treasury Strategist John Spinello. "He thinks rates are going higher."

In fact, there was little reaction in the bond market when news of move leaked out Wednesday morning.

"The Treasury market typifies perhaps the most overvalued area of the bond market," Gross said on Yahoo's Tech Ticker. The move would underline Gross's expectation is that there will not be a third round of US monetary easing. enormous downward pressure on the price of government bonds.

"Bill Gross is now convinced there will be no QE3 at all," Tyler Durden writes at ZeroHedge.

Gross has explained that he thinks the end of quantitative easing would punch a huge hold in the market for US debt.

"Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t.

Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?" Gross wrote in his March letter to investors.

Gross went on to telegraph Pimco's exit: "Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 15% gratuities may lie ahead, but more than likely there is a negative two-bit or even eight-bit tip lying on the investment table. Like I did 45 years ago, PIMCO’s not sticking around to see the waitress’s reaction."

According to Tyler Durden at ZeroHedge, the sell-off took place in January 2011.

The fund has fled to cash: Its cash position has jumped to a staggering $54.5 billion, up from $11.9 billion—a leap of over 350 percent, according to Durden.

Durden reports: "This is the most cash the flagship fund has ever held, and the lowest amount in Treasury holdings since January 2009 before it was made clear that the Fed was going to adjust QE1 to include Treasurys in addition to Mortgage Backed Securities."

"And if Bill Gross, the most connected person to the upcoming actions by the Fed, believes there is no more quantitative easing, it is really time to get the hell out of dodge in all security classes—bonds, and most certainly, equities," Durden writes.

There's a competing point of view on this that should be noted. Some wonder if Gross doesn't have the effect of the end of quantitative easing wrong. Joe Weisenthal at BusinessInsider has argued that one of the motives and effects of QE has been to push investors into riskier asset classes. The end of QE could result in a flight to safety, pushing bond yields down. In short, it could create more buyers for Treasuries—even while removing the Fed.

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