As the U.S. Treasury gets set to issue an additional $66 billion in notes and bonds this week, Pimco bond guru Bill Gross has a message for potential buyers: Stay away.
Gross, who manages the $236-billion Pimco Total Return bond fund in Newport Beach, in February sold the last of the mammoth portfolio's Treasury bonds after saying interest rates were too low to justify holding Uncle Sam's debt.
Now he has gone a step further, actively betting that the government securities will lose value. The fund's government bond holdings have moved below zero, to a "negative" 3% of the portfolio as of March 31, according to updated data from Pimco.
A negative holding typically indicates Pimco Total Return is "short" that amount of bonds, meaning it has borrowed the securities and sold them. In such a case, the fund would profit if Treasury market prices dropped. Gross also could be using derivative securities to bet on lower Treasury prices, which would mean rising interest rates on the bonds.
Another sign that Gross expects longer-term rates to rise: He was keeping 31% of the fund's assets in cash at the end of March, a big jump from 23% in February and just 5% in January. That's a lot of idle money to put to work at some point.
The rest of the portfolio was diversified among mortgage-backed bonds, corporate bonds, foreign debt and municipal bonds.
Pimco Total Return was up 1.5% year to date through Friday, beating 84% of its peer funds, according to Bloomberg data.
Gross, 66, has been highly critical of the federal government's massive budget deficits and of the Federal Reserve's program of buying Treasury securities to stimulate the economy.
Despite Gross' latest warning to avoid Treasuries, the government bond market was stable Monday, with yields up just slightly from Friday, even though the market faces another deluge of supply this week. The Treasury will sell $32 billion in three-year notes Tuesday, $21 billion in 10-year notes Wednesday and $13 billion in 30-year bonds Thursday.
Treasury yields tumbled in mid-March as some investors sought a haven after Japan's massive earthquake, but they have since rebounded. Still, they remain below their levels of early February.
The 10-year T-note yield was 3.58% on Monday, up from 3.17% on March 16 but down from 3.74% on Feb. 8.