US Government Bonds: Get Out Of Long-Term US Government Bonds Now!

| March 11, 2011 | 0 Comments

Do you own US government bonds in your portfolio?  If you do, the time has come to head for the exits.  The smart money is dumping Treasuries like there’s no tomorrow.

Earlier this week the Bond King himself, Bill Gross, made a startling move. Gross manages PIMCO’s Total Return Fund, the largest bond fund in the world with total assets of $240 billion.  And according to Morningstar, the best performing bond fund over the past 15 years.

What did Gross do?

He sold every last long-term US government bond – a whopping $25 billion worth – out of the Total Return Fund’s massive portfolio.  In his February newsletter, Gross said he believes Treasuries are trading at a yield that is 1.5% below where they should be trading.

This is a bold move and one every bond investor should be paying close attention to.

It’s not often you see a bond fund move entirely out of Treasuries. Everyone knows they’re the core holding of US government bond funds.

What’s more, Treasuries have been in a bull market for the past 30 years.  And they’ve provided safety of principal and a steady source of income for millions of investors over that time.

But Gross strongly believes the party is over… at least for now.

About a year ago, Gross began warning investors about a coming bear market for long-term US government bonds.  He said in no uncertain terms, “bonds have seen their best days.”  And last month Gross went so far as to say Treasuries should be “exorcised” from investors’ portfolios.

What’s he so worried about?

Gross believes the Fed’s massive Treasury bond buying spree is the only thing keeping Treasuries from dropping sharply in value.  He recently said, “the overvaluation [in Treasuries] has been dependent on the purchasing power of the Fed.”  More importantly, he doesn’t believe anyone will step in and buy Treasuries when the Fed ends QE2 in June.

That’s a shocking observation.  And one individual investors ignore at their own peril.

Now, if it was just Gross saying these things, we might be able to explain it away.  We might conclude he’s just trying to subtly influence the market in order to take advantage for PIMCO’s investors.  Or we might assume he’s pulled a Charlie Sheen and lost his mind.

But Gross isn’t the only investing legend concerned about the future of Treasuries.

Jim Rogers, the famous global investor who predicted the housing-market meltdown, recently said “US government bonds are not a safe haven.”  He followed that up with a clear warning, “I cannot conceive of lending money to the US government for 30 years.”

What’s more, Rogers is preparing to put his money where his mouth is. According to Bloomberg, Rogers says he’s going to short Treasuries.  He’s expecting a huge price decline thanks to the US government’s “staggering” national debt.

Even Warren Buffet, a vocal supporter of the Fed’s moves during the financial crisis, sees the writing on the wall.  He’s sticking to bonds that mature in a year or less.  According to recent regulatory filings, Berkshire Hathaway (BRK) has increased short-term bond holdings from 16% to 23%.

So what should a bond investor do?

Follow the lead of Gross and Buffet.  Sell your longer-term bonds and move into cash or bonds with very short maturities.  Gross also sees good value in corporate debt and emerging market bonds.

The key is you don’t want to be in longer-term government bonds when QE2 ends.  Interest rates are bound to start moving higher.  And when they do, the value of longer-term bonds are likely to plunge.

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Category: Bonds

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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