PIMCO's $236 billion Total Return Fund reduced its share of U.S. government debt to minus 3% in March, while increasing its cash and cash equivalents to 31%, its highest percentage in four years, according to the company’s website.
The reduction comes after a similar move in February, when PIMCO head Bill Gross reduced the portfolio’s government-related investment’s to zero.
At the time, Eric Jacobson, director of fixed-income research for Morningstar, said, "News started to roll around the market that he had been completely sold out of Treasuries, and lot of people took that to mean that he was so determined to avoid them that he had literally wiped them out of the portfolio, which isn’t exactly true."
What is true, Jacobson said, is that the portfolio had about 3% exposure to TIPS and agency bonds, or 6% total market value, but used swaps that move in the opposite direction to counter interest rate risk. "So if you just look at the totals, it looks like zero, but in fact it’s broken up with a couple of parts," Jacobson said.
The difference between a portfolio with no government securities and one with zero market exposure, according to Jacobson, is that "in theory agency bonds don’t have to move exactly with Treasuries."
One reason for the reductions might be contained in Gross’s latest newsletter, in which he writes the U.S. is “out-Greeking the Greeks.”
“[T]he true but unrecorded debt of the U.S. Treasury is not $9.1 trillion or even $11-12 trillion when Agency and Student Loan liabilities are thrown in, but $65 trillion more! ,” according to Gross.”This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP!”
Gross writes that this will lead to default in one (or a combination) of the following ways:
- Outright default via contractual abrogation
- Surreptitiously defaulting via accelerating and unexpectedly higher inflation
- Deceptively defaulting via a declining dollar
- Stealthily defaulting via policy rates and treasury yields far below historical levels