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Aug. 31, 2011, 12:00 a.m. EDT
By Brett Arends, MarketWatch
NEW YORK (MarketWatch) "” They say the time to sell is when the last bear turns bullish.
When it comes to U.S. Treasury bonds, did that just happen?
Bill Gross, the world's most famous bond manager, has now fessed up that he made a blunder when he turned bearish on the bonds last winter. Gross says his bet against Treasurys was a "mistake" and that he had been "losing sleep" over it this summer. Read the story about Gross losing sleep on the Wall Street Journal web site.
Treasury bonds have been booming to higher and higher prices for months, as fears have grown of a new recession and a deepening financial crisis.
WSJ's Mary Pilon reports Pimco founder Bill Gross regrets ill-timed bets on U.S. Treasurys. He chose to sell off the Total Return Fund's Treasurys holding in February before they rallied soon thereafter. AP Photo.
Bonds work like a seesaw, so when the prices go up, the yield, or interest rate, goes down. Today the interest rate on 10-year Treasury notes /quotes/zigman/4868283 10_YEAR +0.78% has plummeted to just 2.2%. The 30-year bond /quotes/zigman/4868063 30_YEAR +0.71% pays a mere 3.5%. These are at, or near, historic lows.
The "real yield" on inflation-protected Treasuries, known as TIPS, has collapsed as well. Short-term TIPS now lock in a guaranteed loss of purchasing power. Even long-term TIPS don't pay you much over inflation.
In the circumstances, it's easy for commentators to throw rotten eggs at Gross.
But successful investment management is like successful poker playing. It isn't about predicting the future. It's about understanding the odds "” and the other players. And when Gross got out of Treasuries he was making a reasonable decision, based on the prices at the time and the scenarios in front of him.
Uncle Sam is basically broke. The national debt, which was $3 trillion a generation ago, is up to about $15 trillion. Within five years it is forecast to pass $20 trillion.
More importantly, our political system has become a farce. Neither party has any serious intention of dealing with the deficit. Witness the childish and surreal attitudes toward taxes and the Pentagon.
The "super committee" created a month ago is just a feel-good bedtime story you tell to children, which is who we now are.
In the circumstances the only recourse left is for Ben Bernanke to clip the coins "” in other words, to print more dollars to cover the shortfall.
Sooner or later that is going to smoke bondholders. It has already trashed the U.S. dollar.
Why would anyone lend to such an entity for 30 years at 3.5% interest? Or even for 10 years at 2.2%?
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S... Expand
Brett Arends is an award-winning financial columnist with many years experience writing about markets, economics and personal finance in Europe and the U.S. He has received an individual award from the Society of American Business Editors and Writers for his financial writing, and was part of the Boston Herald team that won two others. He was educated at Cambridge and Oxford Universities, and has worked as an analyst at McKinsey & Co. He is a Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS). His latest book, "Storm Proof Your Money," has just been published by John Wiley & Co. Collapse
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