The firm's position on treasuries
Interview: Pimco---Bill Gross--Chief Investment Officer
Interview: Pimco---Paul Mcculley---Managing Director
>> $400 billion in bonds under management, pimco is the world’s largest bond fund manager. brian sullivan sat down with pimco’s chief investment officer, bill gross, and managing director, paul mcculley, and began by asking about the firm’s position on treasuries.
>> bill, you’ve recently said buy anything but treasuries. that said, what are you buying right now and where do we find value in the bond market ? >> gosh, brian, that was a month and a half ago and yield levels in the u.s. of 50 to in some cases 100 basis points lower so we’ve come to a point where there’s more value in the u.s. market , certainly relative to where we were. that doesn’t suggest that the bear market is over but it suggests that the yield curve and forward yield curve have adjusted upwards in anticipation of certainly gradual fed increases and perhaps even more. so there’s more value in the u.s. market than there was.
>> u.s. treasury market ?
>> yes. we’re still a little bit leery of u.s. corporates, anticipating potential imbalances we can talk about in a few minutes. we’re leery of u.s. mortgages, anticipating an extension of their average lives as prepayments decline. that may take six to 12 months in terms of a perception moving into a reality in that market . so the treasury market is where our money is, sort of a safe haven market and we’re relatively neutral there for the moment.
>> shorter or long end of the treasury market right now?
>> we like the shorter end better, which is an anomaly and a contrast to logic. seemingly if the fed were on the move and will be on the move in terms of raising short-term rates, you would think that you’d want to seek a haven in terms of a bar bell or long in cash types of securities. our sense is that the forward curve, one and two years out has correctly anticipated what the fed is going to do and therefore there’s probably more value on the short side than the longed side.
>> let’s talk about the yield curve, paul. the yield curve is still fairly steep by historical standards although it has become less steep in the last couple of months or so. do you see a continued flattening of the yield curve and if you do, do you believe that will be a negative for the u.s. financial services companies who may be have placed a lot of bets on that spread?
>> the yield curve is going to flatten. in fact, the forward curve already has a great deal of flattening embedded in it so the big issue for us is will the curve flatten more than the forward curve has already built in and we think unlikely. so i think probably the most nasty flattening is already implicitly in the marketplace but the actual flattening as the fed walks up the forward curve is a distinct negative for the financial services business. some 40% of s&p profits come from financial services business. and that group has got to be straight in the crosshairs as you look out as the fed walks up even though they may not walk up more than is already discounted.
>> how much of a negative will it be for financial services?
>> it means that lofty expectations for continued growth in that sector in profits will probably not be met. you’ve had incredible profits in that area in the last three years because you’ve had effectively the fed subsidizing those profits and the subsidy will and away so i think the markets , notably the equity market , has to accept that the growth rate for profits in that sector will slow dramatically if not go negative.
>> the australian central bank and bank of england have raised rates recently, saying, in part, they wanted to cool off their housing markets . do you think that’s the right thing for them to do because it could be a good predicator for the u.s. and does that make u.k. and australian sovereign debt more attractive to pimco?
>> looking forward, it does. the act of raising interest% rates is not a lot of fun for bondholders but the consequences of higher interest rates are positive for bondholders because the economy slows, inflation slows, you stop taking up interest rates and ultimately bring them back down so you’re getting close to the end of the tightening process in both of those countries and they’re looking more attractive.
>> we move on. in a bid to cut costs, m.c.i. is going to eliminate 2,000 more jobs at four call centers. this as competition for corporate customers intensifies. with today’s cuts, m.c.i. will have reduced its work force by 27% this year. m.c.i. faces a decline in corporate phone and data prices, plus more competition from at&t. m.c.i. said sales this year will fall 14% to $21 billion. at&t said earlier in the week that operating income this year will be about 1/2 of its previous forecast after it cut prices to corporate customers. european investors are concerned about the strength of the global economy. we’ll have a preview of next week’s market action from our london bureau. that and more coming up.
