June 8 (Bloomberg) -- Pacific Investment Management Co.’s Bill Gross said foreigners are questioning the dollar’s role as the world’s reserve currency because of U.S. polices that keep borrowing rates low to reduce the nation’s debt burden.
Gross, manager of world’ biggest mutual fund, reiterated that investors should avoid U.S. Treasuries because they’re not being compensated for the risk of inflation. Investors should buy debt of nations that maintain better fiscal and monetary policies such as Canada, Germany and Mexico, he said.
“If you’re a foreign holder of dollars,” you should be concerned, Gross said, speaking today in Chicago at the 2011 Morningstar Investment Conference. “Ultimately, they too begin to question, and are already starting to, the soundness of a Treasury bill, bond or note.”
Gross eliminated government-related debt from his flagship $243 billion Total Return Fund in February, from 12 percent of assets in January, as the U.S. projected record budget deficits. Treasuries have rallied 3.2 percent since February as reports on employment and manufacturing showed that the U.S. economic recovery is slowing. The Dollar Index, which measures the U.S. currency against those of six major trading partners, has dropped 3.9 percent in the same time.
Governments such as the U.S. are intentionally keeping interest rates lower than they should be to help reduce record debt levels, setting up investors up for a “pocket picking,” Gross said.
Under a strategy that economist Carmen Reinhart has described as “financial repression,” governments require banks, pension funds and other financial institutions to hold government debt, ostensibly for reasons related to the safety and soundness of the organizations, Gross said.
Such a situation is occurring now and is intolerable because almost four years since the start of the financial crisis, the U.S. has done little to reduce the size of the excess liabilities accumulated, Pimco wrote in what it called a secular outlook last month. The amount of marketable debt outstanding has more than doubled to $97 trillion since the start of the financial crisis.
The Total Return Fund had minus 4 percent of its assets in government and related debt in April, versus negative 3 percent in March, according to the Newport Beach, California-based company’s website. Cash and equivalents, the largest component, rose to 37 percent of holdings from 31 percent.
The difference between yields on 10-year Treasuries and the year-over-year consumer price index, known as real yields, was negative 0.103 percent today, close to the lowest since November 2008. Yields on 10-year notes fell to a low for the year of 2.93 percent.
The Total Return Fund gained 7.66 percent in the past year, beating 76 percent of its competitors, according to data compiled by Bloomberg. It returned 0.56 percent over the last month, beating 55 percent of its competitors. The company is a unit of insurer Allianz SE in Munich.
--With assistance from Alexis Leondis in Chicago. Editor: Dave Liedtka
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