Bill Gross & Pimco Like Munis Too
Kurt Brouwer January 9th, 2009
The ever-quotable Bill Gross of Pimco is now opining on municipal bonds. Apparently, he believes the new administration will also bail out any of the states that are overextended, so he is advocating the purchase of tax-exempt or municipal bonds. This piece from MarketWatch gives the details [emphasis in the original]:
Munis look good as gov’t spigot stays open: Gross (MarketWatch, January 8, 2009, Laura Mandaro)
Debt-ridden states and local governments are poised for a bailout under the incoming Obama administration, presenting a buying opportunity for downtrodden municipal bonds, Pimco founder Bill Gross said Thursday.
Gross, whose management of the world’s largest bond fund has made his recommendations closely watched, said he anticipates that the White House under President-elect Barack Obama will “quickly be confronted by the need to provide those hundreds of billions of dollars to states and large municipalities.”
The next administration isn’t likely to let a big state like New York or California go bankrupt, he added.
He is probably correct. However, California and a number of states are testing the limits of fiscal sanity (see Dark Days for the Golden State and California: Spending Cuts & Tax Increases).
“Municipal bonds then, selling at historically high ratios relative to U.S. Treasurys, offer attractive price-appreciation potential,” Gross wrote in monthly commentary posted to the Web site of the Pacific Investment Management Co., known as Pimco
At the very least, he said, bonds issued by states and local governments offer a better alternative for investors looking for defensive investments other than U.S. Treasurys, whose steep gains last year pushed 10-year yields down to about 2.5%…
…”Pimco’s view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond,” according to Gross.
The $129 billion Pimco Total Return bond (PTTRX) , which he manages, returned 4.8% last year compared with a nearly flat performance in the comparable benchmark.
But the firm’s municipal bonds couldn’t buck a tough year for the typically stable asset class. An index of municipal securities tracked by Merrill Lynch tumbled about 4% last year…
Last week, two of Pimco’s municipal bond funds postponed dividend payments, saying “continued severe market dislocations and further erosions in the municipal bond market have caused the values of the funds portfolio securities to decline.”
Obama is proposing that the Federal Reserve and the U.S. Treasury Department together design a “funding backstop” for state and municipal debt that’s similar to the Fed’s commercial paper program.
The Fed’s offer to buy that short-term debt from companies and banks starting late October has helped lift outstanding commercial paper to levels last seen before the collapse of Lehman Bros.
“This new facility should be designed to protect taxpayer resources while ensuring that state and local governments can continue to provide vital services to their residents,” said the Obama transition team on its Web site.
Pimco’s municipal bond funds had a pretty tough year last year as the article notes. But, looking ahead, Bill Gross sees better times ahead.
Yesterday, we posted that Bill Gross and Pimco are buying bank preferred stocks (see What Are Bill Gross and Pimco Buying?).
Hat tip: Jack H. Scaff III
- Economy , Geopolitics , Investing , Money , Mutual Funds , Personal Finance , income taxes
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