Who Do You Believe About Japan’s Need to Sell US Treasuries?

March/19/2011 16:56PM
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Here are two versions of the need for Japan to sell-off US Treasuries to finance reconstruction.

First, from Treasury Secretary, Tim Geithner.

WASHINGTON (MarketWatch) — In response to a question, Treasury Secretary Tim Geithner said Tuesday that he does not believe that there is a risk Japan will have to resort to selling some of their U.S. Treasury holdings to raise cash in order to respond to the damage caused by an earthquake and tsunami. “I do not,” Geithner said in response to a question by Sen. Charles Schumer at a Senate Banking Committee hearing. “Japan is a very rich country and has a high savings rate and has the capacity to deal not just with the humanitarian challenge but also the reconstruction challenge they face ahead.

Next, from a group of economists.

WASHINGTON — Japan increased its holdings of U.S. government debt for an eighth straight month in January. But the second-largest holder of U.S. Treasury bonds will likely scale back its purchases of foreign holdings, and even sell off some, in coming months to divert money toward rebuilding a nation devastated by a powerful earthquake and an ensuing nuclear crisis.

The Treasury Department says Japan boosted its holdings 0.4 percent to $885.9 billion in January.

Economists say a reduction in Japan’s foreign holdings would put some upward pressure on U.S. interest rates. But they cautioned the change would have a limited impact. They said the Federal Reserve, which has been buying Treasury securities as part of its efforts to keep interest rates low, would move to counteract any significant increase in rates.

Bill Gross of Pimco, the foremost bond trader in the United States sold off all his US Treasury holdings a few weeks ago. Before the Japanese crisis. Why would Gross sell all his investments in the creditworthiness of the United States? Billions of dollars. I can’t answer that, but one must presume Gross sees inflation coming. The dollar being worth less.

This from Gross:
It’s official. Bill Gross is divorced from the U.S. Treasury. The PIMCO Total Return Fund, the largest U.S. mutual fund at about one-quarter trillion dollars, now holds no U.S. Government securities.

What’s up? Is the U.S. about to be downgraded? Is it bankrupt? Or is this a political thing?
None of the above, according to Gross:
“It’s not a question of dissing the United States or questioning the credit of the United States, but simply a maturity reflection,” Gross said. Treasurys are “mispriced [too high, meaning yields are too low] relative to the inflationary environment and the growth we see ahead and there are better alternatives in order to capture yield.”

(CNBC.com, “Gross: Why Pimco Dumped Treasurys From Biggest Fund,” March 10)
This is a remarkable turnabout from last July, when Gross was fearful of deflation and no growth. At the time, he was stockpiling U.S. Government bonds. For example, Bill’s comment in an interview last July:
Treasurys are fairly valued, considering the low expected inflation and slow growth ahead. Investors are finding it hard to get used to such a low yield. But they’re going to find it hard to get used to the slow growth — or what we at Pimco call the ‘new normal’ — throughout the economy. In that context, a 3.1% yield is okay. It’s a milquetoast valuation.

(CNNMoney.com. “What the bond guru sees coming,” July 22, 2010)
Last year, the percentage of fund assets in U.S. Government securities was 51% in May and 63% in June. Today, it is 0%.
Bill is a troubled soul, yet makes astute investment decisions
In PIMCO’s monthly Investment Outlook, you can read both Bill’s investment thinking and his emotional angst. He has been bothered by many things that have gone on and are going on. And yet, he has directed the investment of the fund to those areas that offered good potential. (This separation of emotion from investment decision-making is the sign of a successful investor and is well worth emulating.)

If Gross sees that, why wouldn’t the Japanese see it as well? If they do, they have over $800 billion in our Treasury notes to sell at a time when they need cash to finance their reconstruction. If they dump some, most, or all, it will put pressure on interest rates and add to what many feel is budding inflation, making the dollar worth less.

So, there it is. You can believe Gross, you can believe Geithner, or you can believe the economists who are somewhere in between.

If you are holding US Treasuries, you need to think about all of this.

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