Italy and neighboring countries have “too much debt and too little growth and too few policy solutions,” Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene from Pimco’s headquarters in Newport Beach, California. In Italy “we now have technocrats. But does that matter? Will that provide a solution? Probably not to our way of thinking. So Italy and many of its southern neighbors remain in trouble.”
Italy sold 3 billion euros ($4 billion) of five-year bonds today, the maximum target, at the highest yield in more than 14 years as Mario Monti seeks to form a government to restore investor confidence in public finances. The Rome-based Treasury sold the bonds to yield 6.29 percent, the highest since June 1997 and up from 5.32 percent at the last auction on Oct. 13. Demand was 1.47 times the amount on offer, compared with 1.34 times last month.
Recession could be deep in Europe, Pimco Chief Executive Officer Mohamed El-Erian said during the interview.
In Europe “one crisis leads to another crisis unless you find a really effective circuit breaker,” said El-Erian. The creation of the new government in Italy “is certainly not sufficient. You fundamentally have to convince the people that they have to sacrifice and come up with a set of policies that allows the economy to grow and not just austerity. Europe so far hasn’t come close.”
The yield difference between Italian 10-year government bonds and German bunds surged to a record 5.5 percentage points on Nov. 9 after the nation’s borrowing cost breached the 7 percent threshold that prompted Greece, Portugal and Ireland to seek bailouts. A day later, Prime Minister Silvio Berlusconi agreed to step down when an emergency budget package was passed.
Italian lawmakers approved the austerity measures Nov. 12, clearing the way for Monti, a former European Union competition chief, to try and form Italy’s next government.
Italy’s 10-year yielded 6.70 percent at 12 a.m. in New York, down from as high as 7.5 percent last week.
“The Europeans have taken a long time to understand the depth of their issues,” El-Erian said during a later interview on Bloomberg Television’s “Surveillance Midday.” “They need a circuit breaker. They need to calm things down. And that’s the European Central Bank. Secondly, Germany has to come up. They both have to step up to the plate.”
Total Return Fund
Gross increased his holdings of Treasuries and developed- markets debt in October as Europe’s sovereign debt crisis worsened. Government and Treasury debt as a percentage of the $244 billion Total Return Fund climbed to 19 percent from 16 percent the previous month, according to data posted on Pimco’s website last week. Developed-market debt rose to 22 percent from 20 percent in September. Mortgage securities, the largest holdings, remained at 38 percent.
Pimco continues to favor sovereign debt of nations including the U.S. and U.K. where central banks are keeping interest rates low and embarking on monetary stimulus programs such as debt purchases, said Gross during today’s interview. Canadian and German debt also remain attractive, as do French and Spanish sovereign debt to a lesser degree, Gross said.
Treasuries have returned 8.6 percent in 2011 in what would be their best year since the depths of the financial crisis in 2008, according to Bank of America Merrill Lynch indexes. Gross eliminated Treasuries from the portfolio in February and has increased the holdings amount since then.
The fund, which is having its worst run this year since at least 1995, regained its spot among top bond funds last month as investors returned to riskier assets. It returned 2.01 percent in the past month, beating 93 percent of rivals. It has returned 3.07 percent this year, according to data compiled by Bloomberg. The firm managed $1.34 trillion in assets as of June.
Gross, who last month told clients he hasn’t lost his touch after missing the biggest quarterly rally in Treasuries since 2008, was helped by a rebound in riskier assets such as corporate credit and non-U.S. holdings.
The fund’s emerging market holdings rose to 15 percent last month, from 13 percent and cut government agency debt to 1 percent from 2 percent. Cash equivalents and money-market securities fell to negative 23 percent in October from negative 19 percent. The fund can have a so-called negative position in a sector by using derivatives, futures or by shorting a security.
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