Bond manager Bill Gross of PIMCO clearly feels deflation is still a threat. His actions speak louder than any words he might speak given that he has been buying long-term treasuries over the past few weeks. Gross now has 44% of his Total Return Fund's assets in government related bonds, which is the most since August 2004. Back only 3 months ago, Gross had only 25% of the fund in these assets. In doing so, PIMCO and Gross sold some of their mortgage debt.
This is a notable shift because Gross plowed the Total Return Fund's assets into corporate debt earlier in the year as he liked buying debt of companies that had deals with the government as he felt security there. While one could speculate that maybe Gross was just 'taking profits' in corporates as the easy money there has already been made, the force of his move into long term bonds speaks volumes and stamps down an emphatic deflationary viewpoint. Gross feels that there will be a flattening of the yield curve due to deleveraging, deglobalization, and regulation. Such a move in yields would constitute short-term rates rising while long-term rates fall. And as the name implies, this is the complete opposite of curve steepening. In the past, we've covered how numerous hedge funds have had a stark difference of opinion by putting curve steepener trades on. In particular, we just last week focused on hedge fund legend Julian Robertson's curve caps play. So, it's interesting to see the 'battle' here between deflation and inflation, and respectively Gross and Robertson.
In Bill Gross' September commentary, he draws a few conclusions upon which he can focus his strategy around. PIMCO essentially feels that global interest rates will remain low for an extended period of time while markets and economies recover. Drawing on that point, they think that the duration and extent of quantitative easing as well as stimulation efforts will be a crucial factor in determining investment returns. PIMCO likes to 'play on the government's team' in this regard as they favor exploring investments that will benefit or remain secure from government policies. They also think that the dollar will suffer over a longer timeline. Gross is counting on long-term rates coming down as assets are substituted for cash on the sidelines. Basically, he is betting that institutions will look to sell some reflated assets and use cash to take care of debt or refinancing. So, definitely interesting conclusions and you can read the rest of PIMCO's thoughts here. The main thing to take away though is the fact that Gross has a deflationary viewpoint and sees an emphasis being placed on delevering, deglobalization, and regulation.
For more from PIMCO and Bill Gross, you can read his September commentary here and his August commentary here. And for the other side of the argument, make sure you check out our piece on Julian Robertson's inflationary wager. The deflation versus inflation debate continues as more and more warriors enter the ring, placing their bets on the outcome. It certainly will be interesting to see who wins because there are always two sides to a trade. However, the intriguing thing here is that both sides could technically win if the participants are patient through the gyrations in their respective positions and choose ideal exit points as rates and the markets continue to shift. At this stage of the game, anything's possible in these crazy times.