Gross Says Euro Debt Downgrades May Force Selling: Tom Keene
Pimco's Bill Gross
Andrew Harrer/Bloomberg
Pimco's Bill Gross.
Pimco's Bill Gross. Photographer: Andrew Harrer/Bloomberg
Pacific Investment Management Co.’s Bill Gross said credit-rating cuts of euro-area debt may trigger some forced selling by investors who are required to hold only the highest quality securities in their portfolios.
“There are those that say the downgrades don’t matter,” Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “In fact they don’t for the most part. But there are regulatory issues in the case of structures that are dependent on certain types of ratings and to the extent that various countries get downgraded, then those positions have to be reduced if only because of regulation.”
Standard & Poor’s announced after financial markets closed on Jan. 13 that it was downgrading the debt of several European nations included France, Italy, Portugal and Spain, while Germany was affirmed at AAA. France was cut to AA+ from AAA and the rating was assigned a negative outlook. S&P warned that crisis-fighting efforts of euro area leaders were falling short.
Spanish and Italian bonds rose for a second day as borrowing costs fell at sales of government bills from Belgium to Greece, damping concern that credit downgrades would drive Europe’s debt yields higher.
The yield on 10-year Spanish bonds fell six basis points, or 0.06 percentage point, to 5.12 percent at 10:58 a.m. New York time. The rate on the securities jumped nine basis points to 5.22 percent on Jan. 13 amid reports of an imminent downgrade.
Draghi Comments
European Central Bank President Mario Draghi said investors largely priced in the euro-area sovereign downgrades from S&P and questioned the importance of ratings companies.
“I will never comment on ratings as such, but certainly one needs to ask how important are these ratings for the marketplace overall, for investors?” Draghi said yesterday at the European Parliament in Strasbourg.
Greece, the euro area’s most indebted country, is unlikely to be able to honor a March 20 bond payment of 14.5 billion euros ($18.5 billion), Fitch Ratings Managing Director Edward Parker said today in Stockholm. Efforts to arrange a private sector deal on how to handle Greece’s obligations would constitute a default, he said.
Greek Prime Minister Lucas Papademos is scheduled to meet tomorrow with a group representing private bondholders after a five-day break to hold talks on forgiving at least 50 percent of the nation’s debt in the euro area’s first sovereign restructuring. Greece’s official creditors begin talks Jan. 20 on spending curbs and budget cuts that will determine whether to disburse additional aid.
Greece Debt
“The critical question to me, and at Pimco, is at what level is the new coupon” on the restructured Greek debt, Gross said. “They are talking about a 50 percent haircut but critically it’s important what the future coupon on the new debt is.”
Pimco has been advising investors to buy U.S. Treasuries, long-term inflation-indexed U.S. debt, “high-quality” corporates, senior bank debt and municipal securities.
The $244 billion Total Return Fund (PTTRX) run by Gross increased its holdings of U.S. government debt in December to 30 percent, the highest level in 13 months. He had eliminated Treasuries from his fund in February before adding them back in November.
Treasuries returned 9.8 percent in 2011, while Gross’s Total Return Fund gained 4.2 percent, underperforming about 70 percent of its rivals, according to data compiled by Bloomberg. The fund has increased 2.03 percent in the past month, outperforming 98 percent of its rivals.
To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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