Bill Gross: 'Central banks are where bad bonds go to die'September 18, 2012: 1:53 PM ET
The Bond King came out swinging against the most recent easing plans out of the Federal Reserve and European Central Banks on Twitter late Monday.
Gross: Central banks are where bad bonds go to die. Sell bad bonds, buy good ones. Investing sometimes can be very simple.—
(@PIMCO) September 17, 2012
The comments from Bill Gross, founder of investing firm Pimco, come just days after the Fed unveiled its plan for a third round of quantitative easing -- or QE3. The Fed will buy $40 billion of mortgage-backed securities each month for as long as the economy warrants it. A week earlier, ECB president Mario Draghi said the central bank is prepared to make "outright monetary transactions," or OMTs, in the secondary bond market to help alleviate strains on troubled European nations. Spain and Italy are expected to benefit from this plan.
Gross isn't just talking (or tweeting as the case may be) tough. He cut the holdings of Treasury bonds to 21% at the end of August in the Pimco Total Return Fund (PTTRX). That fund is the world's biggest bond fund, with $273 billion in assets. Treasury holdings were at a peak of 35% in May and June.
Gross extended his Twitter argument on Tuesday, highlighting his thoughts on inflation, which weigh on bond returns over time.
Gross: To own a TIP you need to believe in 2.5% inflation or more in future years. I do. We are in the age of inflation.—
(@PIMCO) September 18, 2012
Though not quite as drastic, Gross' latest position is reminiscent of his bearish outlook on Treasuries last year. And that call didn't exactly turn out so well. In February of 2011, Gross slashed his fund's exposure to U.S. government debt to zero, betting that U.S. Treasury prices would fall yields would spike. That didn't happen, and just six months later, Gross admitted his bet was a "mistake." His fund returned just 4% in 2011.
Gross has gotten Pimco Total Return back on the right path this year, thanks to the fund's 50% position in mortgage-backed securities. In fact, the Pimco Total Return Fund is up more than 8% this year, while the benchmark Barclays Capital Aggregate Bond Index is up less than 4%. As the Fed concentrates its latest purchases on mortgage-backed securities, Gross' fund could gain even more in the months ahead.
Pimco was not immediately available for further comment about Gross' tweets.