PIMCO’s Bill Gross joined Bloomberg Television’s Trish Regan and Adam Johnson on “Street Smart” today and said, U.S. will avoid a ‘catastrophic’ default on Treasury securities if lawmakers fail to extend the debt limit on the nation’s debt. Gross went on to say that a default will be “unimaginable” and would trigger a “complex series of events worldwide.”
Gross also told Trish Regan and Adam Johnson that Janet Yellen will be the next Fed Chairman.
On how investors should be thinking about the looming debt ceiling:
“Let’s look at this from two different angles. In this particular shutdown continues, it probably affects economic growth by .1% a week. That is what happened in 1995 with the Gingrich shutdown. It has happened before that. In terms of prior shutdowns, there have been many. There will be a slowdown in economic growth. Fourth-quarter economic growth will continue for three weeks. They quickly were repaired. There is no eventual impact in terms of economic growth. Much ado about nothing. The big date is October 17 on the debt ceiling. We will see if the dates can be merged together and show a category five storm instead of a category one.”
On whether there is a chance it could be a category five:
“With the debt ceiling we will have to see. It is a delicate dance in terms of investor perception and rating services and the like. The rating services to this point, Moody’s very boldly suggested that they did not do anything. The real happy service compared to some of the other standard. It might take a more dour outlook. It is the investors. The vanguard of the world. The retail investors. The central banks of the world that will be affected by this delicate dance and so want to collect fiasco in Washington that continues and continues without some type of resolution. Yes, October 17th can be important. “
On what happens to the yield on treasuries if we default on our debt:
“Catastrophic. And don’t just look to treasuries. Markets are interrelated. We have complex markets in terms of money market funds and repo and interconnected types of relationships that depends upon the solvency of the U.S. Treasury. The U.S. Treasury is basically the center of the global financial conflict. The default is unimaginable. If it happens, it will set into motion a complex series of events that affects not just bonds but credit transit transactions on a worldwide basis equity prices commodity prices. We do not want to see that happen.”
On whether people will be seeking a safe haven asset if US Treasuries default:
“Well of course…If they did default, would there be a safer haven on a global basis? Of course there will be German bunds there will UK gilts there will be other sovereign entities that have not defaulted. Would there be a flock to U.S treasuries if they defaulted. Of course not. There will be a drastic movement away from U.S. treasuries because early investors simply do not like defaults.”
On what will happen to stocks:
“The stocks are growth related. Stocks are default sensitive to a certain extent and if the sovereign mother defaults on their obligations then what could be next in terms of corporations so the whole intertwine connectivity of credit and credit markets and equity related securities will be unwound in drastic fashion. This is not going to happen but this is the potential if did happen”
On whether the government will get their act together by the deadline:
“Treasury brings in perhaps 60-percent of the revenues. The debt service costs are about $25 Billion. The Revenues are $150 Billion per month. They cover their interest expense by six times. The treasury is not going to default on their debt simply because the debt ceiling is not going to be raised. There will be other repercussions. There will be slow economic growth. The Treasury will not default. That is the last, that’s the last option.”
On whether buying credit default swaps on US debt is a ‘sucker’s bet’:
“It depends on your cause. Credit default swap takes into consideration some very technical aspects. If it defaults the most deliverable security would be something that will be valued at $.85 or $.90. In other words, those selling protection would receive $.85 on the dollar even though the treasuries ultimately might be money good. It becomes very technical in terms of what it is worth. It has moved to 20 to 25 basis points to 35 to 36, 37 basis points. That see me still suggests an odds of maybe a million to one in terms of a treasury default.”
On whether he is staying the course with what he is holding now:
“What we have done is to buy and hold treasuries at the front end of the curve. What we think is the most defendable aspect of policy going forward, whether it is the debt ceiling, the CR resolution, the Fed going forward, is the a fact that the Fed probably will stay put. In terms of 25 basis points, not talking taper here stay put in terms of policy rate for the next two or three years. What the market is interpreting is that the Fed will raise interest rates by 100 basis rates by December of 2015 and by another hundred by 2016. We do not believe that. We said bet against it. What does that mean? It means by front end treasuries by 3,4,5 year treasuries that incorporate the mispricing in terms of fed policy rates going forward. We think, when Janet Yellen and I say when Janet Yellen is appointed… I cannot confirm it. I can give you 99.9-percent pure that she will be head of the Fed come six months from now. If she is, then she is a main proponent of forward guidance. She and Michael Woodford basically suggested that after tapper that forward guidance is the thing. What we believe at PIMCO is forward guidance in terms of keeping the policy rate low under certain conditions that probably will not be met. The policy rate is the key. You should buy treasuries yes but on the front end. Don’t by 30s, don’t by 10s because these are inflation incentive. Buy something that the Federal Reserve is going to guarantee for the next several years.”
Video for viewing here.
Bloomberg Television
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