PIMCO Out of U.S. Treasuries - 3 Ways to Bet With Bill Gross

Bill Gross, captain of the biggest ship in the bond galaxy, has taken PIMCO’s U.S. Treasury holdings to nil. That’s pretty extreme, and pretty all-at-once. He just headed straight for the exit – no selling a little bit at a time, no legging out slowly into June, when the Federal Reserve is scheduled to end its bond purchase program.

The Fed is buying bonds for four more months. And here is Bill saying Arrivaderci to T-bills. To me, I’m thinking of this like Jim Cramer thinks of insider selling. It’s just bad news when someone who has a ton more info than me is exiting. I was trying to put my head around why he did it now, why all at once, and what should I be doing so I’m not holding the hot potato when the music stops?

One thing is for sure, if he unloaded Treasuries all at once at the end of the Fed’s bond purchase program, it might trigger a run. Japan (who needs funds to rebuild) and China (who needs us less and less), the biggest holders of U.S. sovereign debt, might front run and cause a panic. So that explains timing, I think.

As to why, that’s the easy one – Bill thinks interest rates have to rise when the Fed bond purchase program expires. We are facing some serious headwinds with Japan and the Middle East and Europe still shaky, and usually the reliable safe harbor would be U.S. Treasuries. But I don’t think the smart money will do the same song and dance if any of those crises comes to fruition (For an awesome list of the headwinds facing the economy, check out HiddenLevers Scenarios list – I truly think this is the most provocative page on the Interweb).

Bill’s no dummy, and as I pointed out last week, the dollar is dying a slow death. Higher interest rates will surely be here this summer, and if Japan pulls out of Treasuries at the same time as the Fed ends the program, the multiplier effect might take hold, sending us into a bad situation. Here’s HiddenLevers take on how bad the High Interest Rates scenario could get:

Chart created using Hidden Levers app.

From what’s been said, at least part of Bill Gross’ strategy to fight through this will be with TIPS (inflation-linked government bonds). You might try the iShares TIPS Bond ETF (TIP) to get the job done:

Chart created using Hidden Levers app.

I used the HiddenLevers chart to get to this, but I found some plays that had way better inverse correlation to Treasuries — Mastercard (MA), with a 12m T-Bill impact of -45.96 and Anheuser-Busch InBev (BUD) which makes most of its money abroad, with a 12m T-Bill impact of -44.56.

I’m very concerned about the future of the U.S. dollar now, and I’m pretty sure Bill is too.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.