Well folks, here it is the largest bond investor has dumped all of its (US) bond positions according to a published report in the Wall Street Journal. The move to sell by Bill Gross, founder of the Pacific Life Investment Management Co. took some by surprise; however it makes a world of sense as bond values run the risk of a fall once the Federal Reserve ends its $600 billion bond buying spree (QE) in June.
As the Pimco Total Return Fund, the world’s largest mutual fund, held 12% of its funds value in government securities during the month of January, however it owned no government-related debt by the end of February. In addition, Gross has also expressed concerns other than just Quantitative Easing (QE) about the bond market as its feared that nervous investors would likely ditch Treasuries en masse as the U.S. government gets closer to a staggering high debt ceiling.
Remember that bond investors are creditors and as such in buying a Treasury note, purchasers are in essence lending the US Government money in exchange for a promise to return it later with interest. So it’s important that bond investors closely follow the ability of the government to repay debt. In addition, U.S. government bonds and the dollar have been the underpinning infrastructure of the global financial markets since the end of World War II. Here the Treasury yield is also used as a benchmark for all borrowing, and is a point of comparison for debt around the world and any risk in this space will lead to destabilization of world markets which as one can imagine is not a good thing.
So what does this mean to us Joe Average folks working in the trenches every day? The bottom line is the solvency of our country as if Bill Gross feels this way, what about the Chinese? Yes, they are the biggest buyers of US debt and in as such the largest lender to the American Government. To put this into context, if you borrow money to buy your home and what happens if you can’t pay? Yes that’s right, the bank as the lender takes your house and while it might be a little hard for China to come over and repose say California or Texas. It does mean they will most likely stop buying US bonds which means we run a risk of a liquidity crises and the treasury (mint in reality at the direction of the treasury) will have to fire up the printing presses making the problem even worse.
We’ve also covered this in prior posts what will happen should this come to pass as with QE 1 & 2 the US government is stealing money from your wallet and you don’t even know it as if you had ten bucks, you still have the same 10 George Washington’s right? Wrong, as currency is valued by the amount in circulation and therefore the more in the market the less its worth and so every dollar saved now has a lesser value. This was the cunning move of QE 1 & 2, as instead of raising taxes where a visible impact would have been created which people could see, they went underground with the process.
Unfortunately the people of the United States are looking at a coming decade of austerity measures which have not been seen in the life’s of many who are alive today. As the philosophy of buy now print later has to come to an end and responsibility and accountably reestablished…
Note: Those from their High School Civics class will remember that there are only two ways the government can raise money, the first is Taxes and the second is printing money. So the latter option is only will make things worse because we’ve spent money we don’t have, thus the prior (Taxes) is our inevitability.