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PIMCO Urging Folks to Buy UST's - Does this mean that a Stock Market Correctionand Dollar Rally are on the Horizon?
We find it extremely curious that Bill Gross of PIMCO, the world's biggest bond fund hasbeen going around urging people to buy U.S. Treasuries (USTs) since late September. Hiscall to buy USTs certainly flies in the face of all financial logic, given that the Fed is soon toend its quantitative easing (QE) program to buyback $300bn of USTs in October. A removalof Fed support from under the USTs, coupled with an economic recovery (as Bernankewould like us to believe) should logically cause UST prices to fall (yields to increase).Then why is Gross pushing to buy USTs especially the long end of the curve, whichaccording to Gross will flatten further (yields will fall, prices will rise)? Is he merely talkingup his book? Why would Bill Gross a very smart man, who is most definitely a Fed
“
insider
”
(Bernanke
‟
s ex-boss Greenspan works for PIMCO), risk his reputation and go out and urgefolks to buy Treasuries?Our thesis is that he is probably acting at the Fed
‟
s urging. The Fed is aware that once QEstops in October*, there is a huge risk that UST prices will fall and rates will go up choking anascent economic recovery. This view was confirmed by Bill Gross himself who stated today
that,
“
the prospect of an end to the Federal Reserve's debt buyback programs could addselling pressure to several credit markets, including U.S. Treasuries
”
.Now we are firm believers of the fact that there is no such thing as a
„
free
‟
market, allmarkets are
„
managed
‟
. If asked to choose between keeping the equity markets happy orUST yields low the Fed would always pick the latter. So how does the Fed get around theproblem this time?As Bob English of thePrecision Report has repeatedly pointed out, that in the face of a
record UST issuance pipeline, the only way to fill the hole left by the Fed
‟
s QE is to engineeranother flight-to-safety trade from equities and high yield bonds. With the S&P currentlytrading at 1066, the equity markets are fast approaching their pre-crisis September levelsof ~1270. Having rallied ~60% off its 666 low the S&P 500 reflation trade bothfundamentally and technically does not have much more room to run. So a correction inequities could easily be engineered using the futures markets (just like the rally was as wehave document in our earlier report).
We would therefore caution investors to look out for an equity correction and a dollar rally,as investors dump equities and high yield bonds for the safety of USTs. This will probablylast at least a little while, till the Fed restarts its QE machine again and the cycle repeats.
Note
: *
The Fed
’
s QE program in Agency MBS is to run till March of next year.
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