London: Pacific Investment Management Co's Bill Gross increased his holdings of Treasuries to the highest level since July 2010, while billionaire investor Warren Buffett called them "dangerous".
Gross boosted US government and Treasury debt to 38 per cent of assets in Pimco's $250.5 billion (Dh919.33 billion) Total Return Fund, the world's biggest bond fund. The position in January climbed from 30 per cent in December, according to a report on the company's website on Thursday.
Buffett, the chairman of Berkshire Hathaway Inc, said taxes and inflation should dissuade investors from debt. That puts him in the camp with Laurence D. Fink, chief executive officer of BlackRock Inc, the world's largest money manager, who said last week investors should have 100 per cent of their holdings in equities because they offer higher returns than bonds.
Warning label
"They are among the most dangerous of assets," Buffett said on Thursday in an adaptation of his annual letter to shareholders on Fortune magazine's website. "Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal."
US 10-year yields fell two basis points, or 0.02 percentage point, to 2.01 per cent yesterday as of 7:10am in London, according to Bloomberg Bond Trader prices. They set a record low of 1.67 per cent on September 23.
The difference between 10-year rates and the annual increase in consumer costs, known as the real yield, was negative 0.99 per cent. The shortfall was as much as negative 2.14 per cent in October, which was the most since 1980.
"Bonds should come with a warning label," wrote Buffett, who is based in Omaha, Nebraska.
Berkshire still holds "significant amounts" of debt, mostly short-term securities, according to the investor letter. "At Berkshire the need for ample liquidity occupies centre stage and will never be slighted, however inadequate rates may be," he wrote. "We primarily hold US Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions."
Gross, based in Newport Beach, California, has also addressed negative real yields, calling them a form of "financial repression" in his investment outlook released last month.
Pimco is favouring Treasuries due in five, six and seven years because of the Federal Reserve's pledge to keep short-term rates low, Gross said on February 3 in an interview with Tom Keene and Ken Prewitt on the Bloomberg Surveillance radio programme.
Inflation outlook
The Fed is "not really afraid of higher inflation", making 10- and 30-year Treasuries unattractive, he said.
Central bank policymakers signalled in their January 25 policy statement that they will keep the benchmark interest rate at virtually zero until at least late 2014, and Chairman Ben Bernanke said he's considering buying bonds to sustain the expansion. Bernanke told US lawmakers on February 2 that he's not seeking faster inflation as he tries to create jobs.
The Total Return Fund has about 8 per cent of its holdings in Treasury Inflation Protected Securities in an "inflation bet," Gross said in the February 3 interview.
