Over the past year, however, the process has reversed course ...What’s an investor to do? The simplest way to explain this is that during the past 60 years or so, an investor wanted to follow the energy outward from the nucleus. A financial system in the process of levering leads to excessive returns for electrons on the perimeter. When the process reverses, however... an investor wants to be at the center – in Treasury bills or bank CDs. In fact, over the past 12 months, those government-guaranteed, low-durational assets have been virtually the only ones to show positive returns.
There will come a time, however, perhaps over the next few weeks or months, when deleveraging of the private sector is met by the leveraging up of the government sectors: the TARP, CPFF, and MMIFF will inject over a trillion dollars of liquidity into the system over a short period of time. At that point [the system] should begin to stabilize, and [the investment climate] should be safer ...PIMCO would focus on the following:
- A continued above-average allocation to agency mortgage-backed securities – now yielding close to 6%.
- An overweight position in bank capital – bonds and preferred stock in companies where the Treasury has an equity stake. With Uncle Sam as your partner, default seems remote.
- A focus on the frontend of the yield curve. The Fed will stay low for an extended period of time while the inevitable inflationary pressures of government bailouts lay further out on the yield curve."
Bill Gross, Chairman, Pimco, 11.8.08