Gross: Better Debt to GDP Prospects Outside US

VIDEO: Investors don't have to buy overvalued US Treasuries to stock up after the Fed's purchasing programme stops, says the PIMCO manager

Eric Jacobson 10 June, 2011 | 10:02AM
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Ahead of his presentation at the 2011 Morningstar Investment Conference in Chicago, PIMCO’s Total Return manager Bill Gross explains why he disagrees with the Fed on fund managers having to restock US Treasury bonds after the end of QE2. This is Part II of Gross’ interview, see Part I here and find more on-the-spot conference coverage from Chicago here.

Eric Jacobson: Let's shift gears for a second to the conversation about Quantitative Easing II rolling off this summer. I had a brief conversation with your colleague, Mohamed El-Erian. We talked a little bit about the bifurcation in the marketplace between what the economists of the system are worrying about and thinking about with regard to the overall stock of bonds in the marketplace versus what I gather PIMCO is looking at and thinking a lot about, in terms of what are flows in and out of bonds going to be. That’s a little opaque perhaps, but maybe you can help straighten out and explain to our subscribers what you are thinking about?

Bill Gross: I am going put it simply, because I am a simple guy and I look at the simple metaphors--hopefully this one makes some sense. The flow argument is basically a question as to who will buy them? Now the stock argument is an argument that the Fed endorses and looks at in these terms. The Fed basically says: Listen we've been buying Treasuries for the past two years. And its sort of like at home if you had cupboard of cereals, let's call it Rice Crispies. The Fed basically says, "Hey we've bought all the Rice Crispies for the past two years. So your stock, Mr. and Mrs. Bond Manager, must be low on Rice Crispies. You've eaten through your Rice Crispies over the past two years, because we've bought all the new ones." So they basically say, so when QE2 ends from a stock standpoint from what’s in their cupboard ...

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Eric Jacobson  is director of fixed-income research with Morningstar.