'Bond King' issues stark warning on US debt
Published 13/04/2011 | 08:00
The world's most famous bond investor, Pimco founder Bill Gross, is actively betting against US government debt, in a move that underscores gathering concern in the financial markets about budget deficits and runaway healthcare spending by the US federal government.
Although Congress and the White House reached a last-minute deal on Friday night to cut $38.5bn (£23.6bn) from the current year's budget, overall government debt is many hundreds of times larger than that, and the difficulties of reaching consensus on even small cuts appeared yesterday to have disheartened bond investors.
In March, Pimco created a sensation by revealing it had cut its holdings of US federal government debt - traditionally the safest investment in the world - to zero. But now it has emerged that the firm did not stop there. By the end of March, US Treasuries accounted for -3 % of the holdings in its main fund, the Total Return Fund.
Mr Gross, who earned the nickname "the Bond King" for his expertise, has been issuing increasingly shrill warnings that the US is on course towards in effect defaulting on its debts.
In his latest monthly letter to investors, posted on April 1, he explained that Pimco was selling US Treasuries "because they have little value within the context of a $75trillion total debt burden".
He wrote: "Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies - inflation, currency devaluation and low to negative real interest rates."
In early trading in the US yesterday, demand for Treasuries was indeed receding. As well as long-term questions over the sustainability of US budget deficits, traders are anticipating an uptick in US inflation in figures due later this week.
The official ceiling on US federal government's debt, currently $14.3trn, does not include promises that have been made to pay pensions and healthcare costs for a growing number of retired people.
Adding in the costs of meeting those obligations takes the debt to $75trn, according to Pimco's rough-and-ready estimate.