The bond vigilante speaks
Reuters finance blogger Felix Salmon has previously written that “if you wanted to put a face to the famous bond vigilantes, it would probably feature that famous moustache” of PIMCO CEO Mohamed El-Erian. Well, this morning Chrystia sat down with this famous bond vigilante for an hour-long Thomson Reuters Newsmaker interview and asked him why PIMCO decided to dump all of its holdings of U.S. government bonds earlier this month. Here’s what he had to say:
Everything you buy and hold must have value; it’s that simple… And our estimation at the time was that there was better value elsewhere… Now if the valuations of Treasuries change — and it has been changing; they have been getting cheaper — we will revisit that. But when we looked at what else was available, you have Treasury-like instruments that offer you a lot more value than Treasuries. You have government instruments in other countries that offer you more value. We made a portfolio decision that said at these prices we find better value elsewhere in the fixed-income market for this mutual fund, and as it turned out, that was the right decision to make.
El-Erian listed three concerns PIMCO had about the market for U.S. bonds. First, the Fed, which has been buying 70% of new Treasury issuance in its second round of quantitative easing, will cease it purchases in June, and it is unclear who will step in to buy Treasuries at current prices. As El Erian said, “when you can’t identify a buyer, you don’t want to hold that instrument.” Second, El-Erian doubts that Washington can find a political solution to the U.S.’s medium-term fiscal problem in the near future. Finally, U.S. inflation is a worry for PIMCO. Though increases in the prices of food and energy have yet to feed back into core inflation, El-Erian’s experience investing in emerging markets has taught him that the convergence point between headline and core inflation will be higher this time around than it has been in recent decades.
In response to questions via Twitter about the Fed’s latest round of quantitative easing, El-Erian said “I would not have done QE2.” He speculated that the only reason the Fed undertook a second round of asset purchases was because it believed Congress would not pass an additional fiscal stimulus, and that had the Fed known there would be an extension of the Bush tax cuts and a payroll tax cut, it would not have started QE2. El-Erian also doubted the Fed would embark upon a third round of quantitative easing after the current program ends in June, citing an improving economic outlook at a bleaker political situation:
Posted by Peter Rudegeair.