Romney Threatens Pimco’s Gross With Bernanke-Dumping Plan

PIMCO's Bill Gross
Mexico’s lower debt levels and higher yields made investing in the nation’s debt instead of German notes a decision so obvious to Bill Gross, chief investment officer at Pimco, the world’s largest manager of bond funds, that he ended his June comments on the Pimco Twitter account with the word “duh.” Photographer: Andrew Harrer/Bloomberg

Mitt Romney’s pledge to dump Federal Reserve Chairman Ben S. Bernanke is threatening Bill Gross with losses on his Mexican bonds.

Yields on peso bonds due in 2024 fell 1.04 percentage points this year to 5.62 percent as the Fed’s effort to suppress borrowing costs at record lows caused fixed-income investors to pile into the debt to boost returns. Gross’s Pacific Investment Management Co., the biggest holder of the notes, called Mexican debt one if its favorites Oct. 3, three months after he said he preferred them over German bunds. Mexican bonds returned 18.6 percent this year, twice the average for emerging markets.

Romney, the Republican Party candidate in tomorrow’s U.S. presidential election, has vowed to replace Bernanke when his term ends in January 2014 because “the amount of currency that he’s created” with his purchases of Treasuries and other debt securities have failed to create jobs. Bank of America Corp. says that a Romney win could spark a selloff in Treasuries that will be mirrored in Mexican notes, the most correlated to U.S. government bonds of any debt in Latin America.

“They’ll want a much tighter monetary policy, removing a lot of these accommodative measures which Bernanke has been putting in place, so that’s negative for Treasuries in the short term,” Kevin Daly, who helps oversee about $10 billion of emerging-market debt at Aberdeen Asset Management Plc, said by telephone from London. “The initial reaction to Treasury yields going up is that Mexican peso bond yields could go higher too.”

Yield Gap

Amanda Henneberg, a spokeswoman for the Romney campaign, didn’t return an e-mail seeking comment. Mark Porterfield, a spokesman for Newport Beach, California-based Pimco didn’t respond to voice and e-mail messages seeking comment. Jen Psaki, a spokeswoman for the campaign of incumbent President Barack Obama, also didn’t respond to an e-mail requesting comment.

The 60-day correlation coefficient between 10-year peso bonds and similar-maturity Treasuries touched a 14-month high of 0.59 on Oct. 17, according to data compiled by Bloomberg. A reading of 1 would signal the securities moved in lockstep.

Peso bonds due in 2024 yield 5.62 percent, three times more than similar-maturity U.S. Treasuries, the data show. German bunds yield 1.52 percent.

Mexico’s lower debt levels and higher yields made investing in the nation’s debt instead of German notes a decision so obvious to Gross, chief investment officer at Pimco, the world’s largest manager of bond funds, that he ended his June comments on the Pimco Twitter account with the word “duh.”

Foreign Investment

The International Monetary Fund in April projected that government debt will equal 42.9 percent of Mexico’s gross domestic product this year, versus 106.6 percent for the U.S., 78.9 percent in Germany and 90 percent for the euro area.

While Gross said on the firm’s website Nov. 1 that near-zero interest rates and quantitative easing are not leading to investment in the U.S., mutual funds, pensions and hedge funds outside Mexico poured a record $6.81 billion this year into the nation’s debt securities in search of higher returns, according to data compiled by Cambridge, Massachusetts-based research firm EPFR Global.

International investors held 953.9 billion pesos ($73.2 billion) in fixed-rate Mexican peso bonds, an all-time high, on Oct. 24, data from the central bank showed.

Pimco’s Total Return Fund owns about 12 percent of outstanding peso bonds due in 2024, according to data compiled by Bloomberg, making it the largest holder of the securities. Yields on bonds fell to a record low 5.10 percent in July.

‘More Hawkish’

Claudio Irigoyen, the head of Latin America fixed-income and foreign-exchange strategy at Bank of America, says if Romney wins, speculation will increase that he would push for “a more hawkish Fed” and lead to declines in Mexico’s peso debt as U.S. Treasury yields rise.

Obama led Romney 48 percent to 45 percent in a national poll conducted by the Pew Research Center released on Nov. 4. The survey, conducted Oct. 31-Nov. 3 among 2,709 likely voters, has a margin of error of 2.2 percentage points. In weekend polls in Ohio and Iowa, two of the most hard-fought states, the president held a slight advantage, suggesting the race will turn on which candidate does the better job of turning out his own supporters.

“You can expect a selloff in U.S. rates and that’s going to have an impact on Mexican rates” Irigoyen said in a telephone interview from New York.

Led by Bernanke, the Fed has bought $2.3 trillion of bonds in two rounds of so-called quantitative easing since 2008 to boost the economy and reduce unemployment.

Operation Twist

In June, the central bank expanded its so-called Operation Twist program to replace $400 billion of short-term bonds with longer-term debt, by $267 billion. The Fed announced Sept. 13 a third round of QE with open-ended purchases of $40 billion of mortgage debt a month. Policy makers said they will keep pumping money into the economy until there was “ongoing, sustained improvement” in the labor market.

The Fed said Oct. 24 that rates are likely to stay near zero “at least through mid-2015.” Mexico has kept its benchmark rate at a record low 4.5 percent since July 2009.

Josh Thimons, a money manager at Pimco, wrote in an article posted on Institutional Investor’s website on Nov. 1 that while Treasury yields are likely to rise along with Romney’s chance of victory because of “fear of what he will do when it comes to Fed nominations,” U.S. monetary policy will remain “accommodative” regardless of who wins.

‘Independent Entity’

Alberto Bernal, the head of fixed-income research at Bulltick Capital Markets, says a Romney win won’t undermine the gain in Mexican peso bonds, known as Mbonos, because the U.S. government can’t force Bernanke to change monetary policy.

“The Fed is an independent entity, and Romney cannot dictate the policies of the Fed,” Bernal said in a telephone interview from Miami. “It’s as simple as that. I would not sell Mbonos based on the expectation Bernanke will no longer be head of the Fed.”

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries was unchanged at 160 basis points at 4:49 p.m. in Mexico City, according to JPMorgan Chase & Co.

The cost to protect Mexican debt against non-payment fell one basis point to 99 basis points, data compiled by Bloomberg show. Credit default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

Default Swaps

The peso fell less than 0.1 percent to 13.0412 per dollar. Yields on Mexican interbank rate futures contracts due in December, known as TIIE, fell one basis point to 4.90 percent.

After the Fed announced the latest round of QE on Sept. 13, Romney said the decision reflected Obama’s failure to revive the economy.

“The president’s saying the economy’s making progress, coming back,” Romney said in an interview with ABC News. “Bernanke’s saying, ‘No, it’s not. I’ve got to print more money.” He added that “printing more money, at this point, comes at a higher cost than the benefit it’s going to create.”

Republican Bob Corker, a member of the Senate panel with Fed oversight authority, said at a Bloomberg Government breakfast on Sept. 25 that the move shows Bernanke has “stayed too long.” Romney has called for replacing Bernanke when the chairman’s term expires.

“It’s a year-plus away,” Aberdeen’s Daly said. “The market will certainly be getting positioned for that.”