Should You Cut Exposure to Government Bonds?
February 14, 2011
SAN DIEGO (ETFguide.com) – Is it time to trim your holdings in government bonds? Bill Gross has been reducing exposure to U.S. government debt. The Pimco Total Return Fund (Nasdaq: PTTAX) held just 12 percent of its assets in government bonds in January down from 22 percent in December.
“To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an ‘extended period of time’ is the most devilish of all policy tools,” said Gross in written piece titled “Devil’s Bargain.”
Although low interest rates have bought the U.S. government time to get its financial house in order, there’s no guarantee rates will stay in check or that even the Federal Reserve, in all its power, will be able to keep rates indefinitely low. Since the announcement of the Fed’s $600 billion plan to keep rates in check by purchasing U.S. debt, interest rates have rebelled and gone up. The yield on 10-year U.S. Treasuries is already at 3.61 percent, up almost 1 percent since July 2010 when they were at 2.85 percent.
In a shot at the traditional view that investment portfolios should always have exposure to government debt, Gross said, “Old-fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint.”
Gross manages PTTAX which has around $240 billion in assets and increased 8.36 percent in 2010. By comparison, the total U.S. bond market (NYSEArca: AGG) rose around 6.37 percent.
Anyone with heavy exposure to U.S. government bonds (NYSEArca: TLT) inside their portfolio, especially long-term bonds, should take action to reduce their risk. Waiting for interest rates to spike or for the U.S. to lose its coveted triple A-rated status is a bad idea. Or as uncle Morry once said, “If you fail to prepare then you should prepare to fail.”