Bill Gross, the famous investor who runs the PIMCO Total Return Fund, has sold all of the US Treasury bonds in his portfolio. That sounds like he's selling on the US because he suspects we're bankrupt and incapable of paying back our loans on time. But in fact, it's probably a demonstration of faith that the US economy has rounded a corner and is prepared to grow steadily.
As the Curious Capitalist blog explains
, Gross sold his share of debt because he thinks the price of US Treasury bonds will fall. Bond prices and bond rates move in opposite directions. So when the Treasury bond prices are falling, it means interest rates on US debt are rising. Sometimes interest rates (or yields
) rise because debt seems risky, as we've seen with rising rates across Europe. But for the US, which has enjoyed historically cheap borrowing in the last two years, rising yields might also reflect optimism about US growth. When a country's economy grows robustly, inflation expectations rise moderately, pulling up interest rates on that country's debt.
In a journalist roundtable with Treasury Secretary Tim Geithner and other top Treasury officials yesterday, we asked if the administration was nervous about Gross' move. One Treasury official, whom we cannot name, said that, quite the opposite, he suspects the composition of rising interest rates on US debt is a good sign for the economy. It's a bet that we'll see higher yields reflecting higher expectations about US growth. (It should be said here that rising yields on US debt, even if they reflect positive feelings about the economy, also make it more expensive for the US and consumers to borrow.)
There's another factor at play: The Federal Reserve's "QE2" policy which is creating extraordinary demand for US Treasuries. High demand for Treasuries means high prices (and low yields). When the Fed pulls back its monetary stimulus, prices will drop. As Gross explained to CNBC: "Overvaluation [of Treasury bonds] has been dependent on the purchasing power of the Fed. When that disappears I question who will be buying [US debt] and at what price."
The upshot: This could be one of those confusing circumstances where selling on US debt means betting on the US economy.
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is a staff writer at The Atlantic,
where he writes about economics, labor markets, and the media. He is the author of Hit Makers