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Credit Insights

What Is Bill Gross Really Thinking?

The timing of the PIMCO manager's move out of Treasuries so many months before the Fed is scheduled to end its bond purchase program strikes us as odd.

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The world's most visible bond fund manager, Bill Gross, has made a sizable bet that interest rates are going higher, as he reduced his funds' holdings in U.S. Treasury bonds to zero and shortened the funds' duration.

While we understand his reasoning (see his recent Investment Outlooks), the timing of his move so many months before the Federal Reserve is scheduled to end its bond purchase program (at the end of June) strikes us as odd. Given that the Fed will be buying bonds for four more months, it seems too early to shorten duration as there is a significant risk that he will face several months of underperformance. For example, if spreads tighten, or if they even stay flat, he will lag the index. In addition to making the bet that interest rates will rise after the Fed stops buying bonds, he also appears to be making a secondary (and maybe unintended) bet to us. That second bet is that the market won't flock to Treasury bonds, sending their prices up, as a safe-haven investment if either the Middle East situation or sovereign credit issues in Europe worsen in the near term.

David Sekera does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.