What Bill Gross and Warren Buffett now have in common

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Treasuries “have little value” because of the growing U.S. debt burden.

The U.S. has unrecorded debt of $75 trillion, or close to 500 percent of gross domestic product, counting what it owes on its bonds plus obligations for Social Security, Medicare and Medicaid, Gross wrote in his monthly investment outlook. The U.S. will experience inflation, currency devaluation and low-to- negative interest rates after accounting for consumer-price gains if it doesn’t reform its entitlement programs, he said.

Pimco “has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden,” Gross wrote in the report published on Newport Beach, California-based company’s website. Congress “must make ‘debt’ a four-letter word.”

The comment echoes Warren Buffett, the billionaire investor who recommended avoiding long-term fixed-income bets in U.S. dollars because the currency’s purchasing power will drop. Treasuries have handed investors a 0.1 percent loss this quarter, adding to a 2.7 percent decline in the final three months of 2010, based on Bank of America Merrill Lynch data.

President Barack Obama’s government has increased the U.S. publicly traded debt to a record $9.05 trillion, leading Gross to compare the nation to Greece, which had its credit ratings cut two steps by Standard & Poor’s on March 29.

“We are out-Greeking the Greeks,” he wrote.

Portfolio Holdings

Gross said in an interview March 11 that he eliminated government-related debt from his Total Return Fund in February because investors aren’t being adequately compensated for the risk of quickening inflation.

Gross had cut the holdings of government-related debt to 12 percent of assets in January, down from 63 percent in June, the highest since the fund held an equal amount in October 2009, according to data on the company’s website. Prior to the cuts, Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009.

Buffett has shortened the maturities of Omaha, Nebraska- based Berkshire Hathaway Inc.’s bond holdings as the Federal Reserve eased monetary policy to stimulate the economy, according to regulatory filings.

“I would recommend against buying long-term fixed-dollar investments,” Buffett, chairman and chief executive officer of Berkshire, said March 25 in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”

Yield Trend

Treasury 10-year note notes are headed for their seventh straight month of losses, with benchmark notes yielding 3.44 percent at 11:47 a.m. New York time, according to Bloomberg Bond Trader prices. The 3.625 percent note maturing in February 2021 fell 1/32, or 31 cents per s$1,000 face value, to 101 1/2.

Treasury yields are about 150 basis points too low when viewed on a historical context and when compared with expected nominal gross domestic product growth of 5 percent, Gross wrote in his previous monthly investment outlook. The yield on the 10- year Treasury note closed at 3.56 percent on that day.

The Fed said in November it would pump $600 billion into the U.S. economy by purchasing Treasuries to sustain the economic expansion. The U.S. economy grew at a 3.1 percent annual rate in the fourth quarter, led by a jump in consumer spending, according to the Commerce Department on March 25.

Break-Even Rate

The U.S. added 190,000 jobs in March, according to the median forecast of 83 economists in a Bloomberg News survey before a Labor Department report tomorrow. Private payrolls are forecast to rise by 210,000 while the unemployment rate is estimated to remain steady at 8.9 percent. The government added 192,000 jobs in February.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, has widened to 2.48 percentage points from 1.82 percentage points six months ago. The 10-year average is 2.0 percentage points.

Treasury 10-year notes pay 1.34 percent after subtracting consumer-price increases, the so-called real yield. That’s down from last year’s high of 2.39 percent in December.

Pimco’s record $236.9 billion Total Return Fund gained 7 percent in the past year, beating 82 percent of its competitors, according to data compiled by Bloomberg. The company is a unit of insurer Allianz SE in Munich.

–Bloomberg

Related Topics: Pacific Investment Management Company (Pimco), Wealth Management