June 29, 2012

PIMCO’s Gross Bearish on Europe After Relief Plan

Bond king says ‘debt trap’ remains despite eurozone deal

Pacific Investment Management Co.’s Bill Gross said a “debt trap” remains even after European leaders reached an agreement intended to alleviate concern that the region’s banks will fail.

Bill Gross, Chairman, PIMCO (Photo: AP)Appearing on “Bloomberg Surveillance” on Friday, Gross (left) said PIMCO continues to avoid the debt of nations including Spain and Portugal in favor of U.S. Treasuries and mortgage securities.

“The peripherals and even the core union nations have too much debt,” Gross said. “The marginal cost of that debt is far above nominal GDP growth in respective nations. That continues a debt trap unless the cost of debt can come down.”

As the news service noted, “five-year notes of Spain, with $935 billion of debt and an 8.5% deficit, yield 5.5%. The nation’s gross domestic product is forecast to shrink 1.7% this year and 0.5% in 2013.”

The debt deal, which came on Friday after about 19 similar summits since the start of the debt crisis (with few results), called for countries that use the euro to allows two European bailout funds to aid European banks directly, rather than make loans to governments to bail out the banks. It also begins to move European countries further toward a common fiscal policy by linking their budgets and governments.

“We need some sense that the family can get along going forward,” Gross added, referring to the second point. “That is a union of some sort. Not just a monetary union but a fiscal union that can have an actual impact going forward.”

Gross raised the proportion of U.S. government and Treasury debt in the $261 billion Total Return Fund to 35% in May, the first increase since January and up from 3% of its holdings in April. Mortgages remained the largest holding in the fund at 52% last month, Bloomberg reports.

“Mexico and Brazil, they’re all attractive markets with clean balance sheets,” he said. “They’re much more safe, so to speak, than some of those peripherals.”

Pimco’s Total Return Fund gained 7.2% over the past year, beating 74% of its peers, according to data compiled by Bloomberg. 

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