Bloomberg is out with a story this evening relaying comments from Pimco.
“The U.S. will get downgraded, it’s a question of when,” Scott Mather, Pimco’s head of global portfolio management, said today in Wellington. “It depends on what the end of the year looks like, but it could be fairly soon after that.”
and
Bill Gross, manager of Pimco’s $278 billion Total Return Fund, this month said that the U.S. will no longer be the first destination of global capital in search of safe returns unless fiscal spending and debt growth slows, saying the nation “frequently pleasures itself with budgetary crystal meth.” He reduced his holdings of Treasuries for a third consecutive month to the lowest level since last October.
and
The Congressional Budget Office has warned the U.S. economy will fall into recession if $600 billion of government spending cuts and tax increases take place at the start of 2013. Financial markets are complacent about whether the White House and Congress will reach agreement on deferring the so-called fiscal drag on the economy until later next year, Mather said.
In a “base case” of President Barack Obama being re- elected and Congress becoming more Republican, there is a high likelihood an agreement “doesn’t happen in a nice way, and we have disruption in the marketplace,” he said.
Policy makers probably will agree on cutbacks that would lower economic growth by about 1.5 percentage points next year, Mather said. They may roil markets by discussing scenarios that would lead to a 4.5 percentage-point fiscal drag, he said.
What is not addressed by this article is what effects will a slowing or a reversal in capital inflows have on bond yields and in conjunction the Federal Reserve's balance sheet. The Federal Reserve's balance sheet is levered up by more than 50-to-1 and any small increase in yields would not only wipe out the Fed's capital position, but also act to turn monetary policy into fiscal policy. As some commentators have pointed out, outside forces acting to push up bonds yields could either force the Fed into drastically reducing the size of its balance sheet or create a game of monetary hot potato that leads to a higher velocity of money and inflation.
I had considered taking off the bet on the Proshares Short 20+ year Treasury fund (ticker TBF) in the trading portfolio, but I now might wait.
“The U.S. will get downgraded, it’s a question of when,” Scott Mather, Pimco’s head of global portfolio management, said today in Wellington. “It depends on what the end of the year looks like, but it could be fairly soon after that.”
and
Bill Gross, manager of Pimco’s $278 billion Total Return Fund, this month said that the U.S. will no longer be the first destination of global capital in search of safe returns unless fiscal spending and debt growth slows, saying the nation “frequently pleasures itself with budgetary crystal meth.” He reduced his holdings of Treasuries for a third consecutive month to the lowest level since last October.
and
The Congressional Budget Office has warned the U.S. economy will fall into recession if $600 billion of government spending cuts and tax increases take place at the start of 2013. Financial markets are complacent about whether the White House and Congress will reach agreement on deferring the so-called fiscal drag on the economy until later next year, Mather said.
In a “base case” of President Barack Obama being re- elected and Congress becoming more Republican, there is a high likelihood an agreement “doesn’t happen in a nice way, and we have disruption in the marketplace,” he said.
Policy makers probably will agree on cutbacks that would lower economic growth by about 1.5 percentage points next year, Mather said. They may roil markets by discussing scenarios that would lead to a 4.5 percentage-point fiscal drag, he said.
What is not addressed by this article is what effects will a slowing or a reversal in capital inflows have on bond yields and in conjunction the Federal Reserve's balance sheet. The Federal Reserve's balance sheet is levered up by more than 50-to-1 and any small increase in yields would not only wipe out the Fed's capital position, but also act to turn monetary policy into fiscal policy. As some commentators have pointed out, outside forces acting to push up bonds yields could either force the Fed into drastically reducing the size of its balance sheet or create a game of monetary hot potato that leads to a higher velocity of money and inflation.
I had considered taking off the bet on the Proshares Short 20+ year Treasury fund (ticker TBF) in the trading portfolio, but I now might wait.
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