Bond king Bill Gross has plunged 60% of PIMCO’s Total Return Fund into Fannie (FM) and Freddie primary mortage debt under the following (intelligent) logic: With television cameras roaming Capitol Hill 24/7 to capture Washington’s response to the housing crisis, legislators wouldn’t be caught dead letting these bonds–or the GSE’s–fail. FT:
Mr Gross said his decision to raise exposure to mortgage debt in recent months was based on the US government’s implicit guarantee of Freddie Mac and Fannie Mae, the government-sponsored mortgage agencies.
“Government policy is moving to sanctify the status of the government-sponsored agencies. It became a question of which institutions would be sheltered by the government umbrella,” he said.
Gross underscores that he’s buying the primary debt, “not the subprime garbage.”
Meanwhile, Gross can’t resist taking a shot at the world’s safe haven, which he now considers ludicrously overvalued:
Mr Gross was heavily overweight US Treasury bonds in the early 2000s but is now scornful of them and the fund is using derivatives to gain from any downturn in Treasuries.
He called Treasuries “the most overvalued asset”.
“If there was a bubble, the popping has produced a counter-bubble in quality securities. The safe haven has been way overdone. Treasuries are yielding 2 to 3 per cent, there is no real return on that at all,” he said.
“This is an asset class that is held by sovereign wealth funds and central banks…but that is not any reason to follow them.”