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Gross Says Decades Needed to Normalize From Too Much Debt

Gross Says Decades Needed to Normalize From Too Much Debt
Bill Gross raised the proportion of U.S. government and Treasury debt in the $261 billion Total Return Fund (PTTRX) to 35 percent in May, the first increase since January and up from 31 percent of its holdings in April. Photographer: Andrew Harrer/Bloomberg

June 28 (Bloomberg) -- Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said economies and their financial markets take decades to normalize after the havoc of a debt crisis, making U.S. securities still the safest bet for investors.

An authentic debt crisis, which the world is experiencing, can only be ultimately cured by default or printing more money in order to inflate it away, Gross said in his monthly investment outlook posted on the Newport Beach, California-based company’s website today. The U.S. Treasury market is considered the cleanest “dirty shirts” for investors, Gross wrote.

“Don’t underweight Uncle Sam in a debt crisis,” Gross wrote. “Money seeking a safe haven will find it in America’s deep and liquid, almost Aaa rated, bond and equity markets.”

Gross raised the proportion of U.S. government and Treasury debt in the $261 billion Total Return Fund to 35 percent in May, the first increase since January and up from 31 percent of its holdings in April. Mortgages remained the largest holding in the fund at 52 percent last month, according to data on the website.

In developed nations, Gross has advised investors to favor debt of the U.K., as well as the U.S., as Germany faces risks related to the eventual costs required to end the region’s worsening sovereign and banking crisis.

Zero-Bound Rates

Spain formally requested a bailout for its banks this week and Cyprus also sought a financial lifeline from the euro area’s firewall funds, becoming the fourth and fifth of the currency union’s 17 member states to require external aid.

European leaders are gathering for a two-day summit in Brussels to seek a strategy to contain the region’s debt crisis.

“A debt crisis can’t be cured with more debt” when national- and household-debt levels as a percentage of gross domestic product or household income become “imbalanced,” Gross wrote. “The fact is that the current burden of global debt is only being lightly alleviated via zero-bound interest rates.”

Developed nations’ central banks, from the Federal Reserve to the European Central Bank, have cut rates to at or near record lows since 2008. Fed policy makers have said they expect to keep their target rate for overnight loans between banks low through late 2014. The Fed’s benchmark rate is in a range of zero to 0.25 percent.

German Bubble

The yield on the benchmark 10-year Treasury note fell to a record low of 1.44 percent on June 1. Treasuries have returned a 1.9 percent this year, after gaining 9.8 percent in 2011, according to indexes compiled by Bank of America Merrill Lynch. Mortgage securities gained 1.7 percent, while U.S. corporate and high-yield debt has risen 5.2 percent since December, the index data show.

Gross said during a June 18 interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle that Germany is in a bond-market bubble as the country is saddled with rising liabilities from Europe’s debt crisis. He said he favored debt of the U.S. and U.K.

“I would be leery of German bunds simply because there are only a few scenarios in which they can do well,” Gross said in the interview. “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.

Market Performance

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. Bunds yielded 1.51 percent today.

The Total Return Fund gained 7.05 percent over the past year, beating 80 percent of its peers, according to data compiled by Bloomberg. The fund attracted $124 million in May, according to Morningstar Inc.

To contact the reporter on this story: Liz Capo McCormick in New York at

To contact the editor responsible for this story: Dave Liedtka at

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