By Sarah McDonald Dec. 1 (Bloomberg) — Investors will cut government bond holdings as record state auctions damp prices, Pacific Investment Management Co. LLC said today, after boosting its own holdings in October to the most in five years. Demand is set to grow for higher-quality corporate debt as “excessive optimism” about a global recovery wanes, said John Wilson , head of Pimco’s Australian unit, in a statement today. Bill Gross , who runs the world’s biggest bond fund at Pimco, increased his holdings of government-related debt to 63 percent at Oct. 30, the highest proportion since July 2004, according to data on Pimco’s Web site. “A reduced allocation to government debt in portfolios reflects the likelihood of an underperforming government debt sector, due to the substantial government borrowings prompted by the global financial crisis,” John Wilson , head of Pimco’s Australian unit, said in a statement today. Investors will rely more heavily on cash for liquidity needs, he said. Sovereign bond sales surged over the past year as governments sought to fund stimulus projects to haul the world out of its worst recession since World War II. The U.S.’s debt increased by $1.15 trillion this year to $6.95 trillion in October. That helped push up the cost to hedge against rising yields on Treasuries to a record high last month, according to Barclays Plc data based on the so-called skew in options on interest-rate swaps. At more than 37 basis points, the measure was almost 40 times higher than the average before credit markets seized up in August 2007. Investors will focus on actively managed debt funds to seek stable returns, Wilson said. ‘Excessive Optimism’ “The level of current optimism in financial markets is excessive with many analysts extrapolating recent growth rates into the future without taking into account the effect of temporary factors, such as government stimulus,” Wilson said. “Pimco is concerned that the pace of global growth will falter as the temporary impact of inventory rebuild and government fiscal stimulus fades, and as leverage continues to be removed from the market.” Costs to safeguard against corporate defaults rose over the past week after Dubai World sought a standstill agreement from creditors. Dubai and its state-owned companies borrowed $80 billion in a four-year construction boom to transform its economy into a tourism and financial hub. Dubai World, one of those state-owned firms, said today it began “constructive” talks with banks to delay payments on $26 billion of debt. ‘New Normal’ Pimco’s prediction of a “new normal” investment climate includes lower and slower economic growth, higher risk premiums, volatility and a prolonged correction phase, according to today’s statement. “In the new unleveraged environment, global growth will average about 2.5 percent per annum, compared with previous nominal GDP growth of 6 percent to 7 percent,” Pimco said in the statement. Economic growth will slow in 2010, Pimco said. Gross boosted his $192.6 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other U.S. government-linked bonds from 48 percent of assets in September while reducing his position in mortgages to the smallest since May 2004, data on Pimco’s Web site show. To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net .
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Pimco Says Government Bonds to Decline on Record Sales as Growth Falters
