Bloomberg News

Gross Rebuts Cooperman on Treasuries Citing Risk for Stocks

February 24, 2012

(Adds Pimco fund returns starting in 12th paragraph.)

Feb. 23 (Bloomberg) -- Pacific Investment Management Co.’s Bill Gross said investors should be cautious about substituting dividend-paying stocks for Treasuries as there’s a “huge gap of risk” between the two types of assets.

Treasuries, rated a top AAA credit grade by Moody’s Investors Service and Fitch Ratings and AA+ by Standard & Poor’s, returned 9.8 percent last year, their best performance since 2008, as Europe’s debt crisis intensified and concern mounted that global economic growth was slowing. Stocks have an implied Baa rating, about seven steps lower than the highest investment grade, Gross said.

“Comparing Treasury yields to corporate stock dividends, span a huge gap of risk,” Gross, manager of the world’s biggest bond fund, said during a Bloomberg Television “Street Smart” interview with Trish Regan. “Stocks can go down too, just like bonds, and we certainly saw that in 2008.”

Leon Cooperman, founder of hedge fund Omega Advisors Inc., said yesterday that buying Treasuries is the least attractive investment in a world of “financial repression.”

The Standard & Poor’s 500 Index yields 1.99 percent through dividends, while 10-year U.S. debt yields about 2 percent. The consumer-price index climbed 2.9 percent over the past 12 months, the smallest year-to-year advance since March 2011, the Labor Department reported Feb. 17 in Washington.

Worst Place

Bonds will be the worst place for investors to put their money for the next three years, Cooperman, 68, said in an interview on Bloomberg Television’s “InsideTrack” with Erik Schatzker.

Cooperman pointed out today in a telephone interview after Gross made his comments that Treasury investors risk losing principal if yields rise. A $50 million investment in benchmark 10-year Treasuries yielding 1.99 percent would lose about 3 percent, or $1.5 million, if yields climb to 2.9 percent by June 2013, as forecast in the weighted-average estimate of economists surveyed by Bloomberg.

Treasuries returned 14 percent in 2008, according to Bank of America Merrill Lynch index data. That compared with a 38 percent loss for the S&P 500 including dividends.

While Gross, 67, agreed with Cooperman that fixed-income investments are being eroded by interest rates below inflation, he said holding mortgage securities is an attractive way to bolster returns, with Federal Reserve Chairman Ben S. Bernanke suppressing yields. Fed policy makers said last month they’ll keep interest rates at almost zero through late 2014.

‘Not Going Anywhere’

“If you have an environment in which interest rates aren’t going to change, and that’s the key, is Ben Bernanke good to his promise?” Gross said. “Yields are not going anywhere for the next two or three years.”

Gross boosted the proportion of U.S. government and Treasury debt in Pimco’s $250.5 billion Total Return Fund in January to 38 percent from 30 percent in December, according to a report posted on the company’s website. He raised mortgages to 50 percent, the highest since June 2009, from 48 percent in December.

The fund gained 4.2 percent last year, lagging behind 70 percent of its peers, after Gross missed a rally in U.S. Treasuries and put money into riskier assets, according to data compiled by Bloomberg.

Gross’s fund is making a comeback, gaining 4.56 percent over the past three months, beating 98 percent of peers.

Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.36 trillion of assets as of Dec. 31.

--With assistance from Jody Shenn, Devin Banerjee and Erik Schatzker in New York. Editors: Dave Liedtka, Greg Storey

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Trish Regan in New York at tregan8@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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