Pimco's Bill Gross: In 2012, Buy Treasurys, Avoid Euro Zone
January 04 2012 - 10:15AM
Dow Jones News
After getting burnt by selling Treasury securities in the early
part of 2011, bond investor Bill Gross is placing the asset class
at the top of his shopping list for 2012.
In his monthly investment outlook for January, Gross, founder
and co-chief investment officer at Pacific Investment Management
Co., or Pimco, laid out his investment strategy for the new year,
highlighted by his preference for U.S. bonds and an aversion to the
euro zone's credit markets.
Among his favorites are Treasury securities due between five and
nine years; long-dated Treasury inflation-protected securities, or
TIPS; high-quality U.S. corporate bonds; and selective municipal
debt.
As long as a euro-zone credit implosion is possible, "investors
should gravitate to the 'cleanest dirty shirt' sovereigns with the
least encumbered balance sheets," said Gross in his 2012 outlook,
which was available on Pimco's website Wednesday.
On the other hand, Gross said he will continue to avoid "Venus
fly trap peripheral Euroland paper." Italian bonds offering a 7%
yield are enticing but have "trap door possibilities" that could
see further "price" defaults in 2012, he said.
Pimco, which is owned by Allianz SE (ALV.XE, ALIZF), is one of
the world's biggest asset-management firms with more than $1
trillion in global assets under its management. Gross manages the
firm's flagship bond fund, the $244.1 billion Total Return Fund,
the largest bond fund in the world.
The fund, which in 2011 suffered the first calendar-year outflow
since its inception in 1987, was hurt by Gross's ill-timed bets
earlier last year wagering on price decline in Treasurys. Shortly
after that, the euro zone's sovereign-debt crisis sparked a global
flight into Treasurys as a safe harbor last year with about 10%
return, easily beating U.S. stocks.
Gross admitted he made a mistake and has shifted gear to buy
long-dated Treasury bonds in recent months.
In the January investment outlook, Gross flagged two main risks
confronting investors this year--credit risk linked to the euro
zone's debt crisis and zero-bound interest-rate risk driven by
ultra-loose monetary policy, "offering the fat left-tailed
possibility of unforeseen policy delevering or the fat right-tailed
possibility of central bank inflationary expansion."
Until the outcome becomes clear, investors should consider ways
to hedge their bets, including buying Treasury bonds, said
Gross.
"Both tails are fat," said Gross. "The dollar is king with a
left-tailed delevering scenario--pauper in a right-tailed global
reflationary expansion."
In other asset classes, Gross said equity allocations should
favor higher-yielding companies in sectors with relatively stable
cash flows, such as electric utilities, big pharmaceutical and
multinational companies.
Commodities could go either way, depending on the same tail
risks, but scarcity and geopolitical considerations, such as Iran,
favor a positive tilt, said Gross.
"Gold at $1,550 seems pricey but it has upward legs" if
quantitative-easing measures from major central banks including the
Federal Reserve continue, he said.
-By Min Zeng, Dow Jones Newswires; 212-416-2229;
min.zeng@dowjones.com