Gross Says Germany in Bond Bubble as Liabilities Increase

Photographer: Scott Eells/Bloomberg

Bill Gross, co-chief investment officer of Pacific Investment Management Co. Close

Bill Gross, co-chief investment officer of Pacific Investment Management Co.

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Photographer: Scott Eells/Bloomberg

Bill Gross, co-chief investment officer of Pacific Investment Management Co.

Bill Gross, who runs the world’s largest mutual fund at Pacific Investment Management Co., said Germany is in a bond market bubble as the country is saddled with rising liabilities from Europe’s debt crisis.

“I would be leery of German bunds simply because there are only a few scenarios in which they can do well,” Gross said today in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “Germany for me is a credit risk. It’s not an attractive market.”

Germany is the largest contributor to Europe’s bailout packages for Greece and a collapse of that nation’s economy and its possible exit from the euro area may weigh heavily on Chancellor Angela Merkel’s administration. While German bonds have profited from Europe’s crisis, pushing yields on two-year notes below zero this month for the first time, Gross said the bonds have little room to rise further, except in a scenario such as Germany leaving the euro.

German 10-year yields have advanced from a record low of 1.127 percent reached June 1 as Europe’s deepening crisis fueled concern the currency bloc’s biggest economy will be left picking up a mounting tab. The yield today closed at 1.44 percent.

‘Cleanest Shirts’

The difference between the yield on the 10-year Treasury note and comparable German bunds was at 17.35 basis points, according to data compiled by Bloomberg. The gap was as high as 49 basis points on April 4. The gap has narrowed as investors have favored securities from outside the euro area amid the debt crisis.

Gross, Pimco’s founder and co-chief investment officer, said the U.S. and U.K. are the “cleanest dirty shirts” for bond investors. Pimco is avoiding Spanish bonds because there’s a high probability that they won’t return investors’ money at par, he said.

“It’s not a safe environment as long as the EU and as long as the global economy is delevering, which it continues to do,” said Gross.

To contact the reporter on this story: Alexis Leondis in New York at aleondis@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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