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Pimco said it is reducing exposure to long-term U.S. bonds amid concerns about rising federal deficits and debt. Instead, it prefers shorter-term bonds, some foreign issuers and corporate bonds.
Bond giant Pimco has significantly ramped up market reaction to rising US debt by announcing plans to reduce exposure to long-term government bonds.
In a note on Monday, the world’s largest active bond fund manager referred to “bond vigilantes,” a term coined by Wall Street veteran Ed Yardeni in the 1980s that describes traders who protest massive deficits by selling bonds to raise interest rates. to increase.
While there is no organized group of vigilantes coordinating market moves at a specific debt level, clues about the potential for waywardness can be found in what the biggest bond investors are doing, wrote Marc Seidner, Chief Investment Officer of Non-Traditional Strategies and portfolio manager Pramol. Dhawan.
“At PIMCO, we are already making incremental adjustments in response to rising U.S. deficits,” she added. “Specifically, we are less likely to lend to the U.S. government at the long end of the yield curve, favoring opportunities elsewhere.”
This move represents a major escalation in financial markets due to massive budget deficits and federal debt, which recently reached $36 trillion.
Investors had already shown tepid demand at some US bond auctions, while also sending government bond yields higher, especially after Donald Trump won the presidential election as his tax cut plan continued to widen deficits.
Although Elon Musk has pledged to cut spending by $2 trillion through his Department of Government Efficiency, budget experts have said that isn’t realistic without steep entitlement cuts, which Trump has vowed not to do.
Public debt, or the amount the US owes to external lenders after borrowing in the financial markets, is already around 100% of GDP, and that ratio is expected to soon surpass the all-time high set in the immediate aftermath of the global crisis was established. War II. But this time it will take place without a global catastrophe, while the economy remains robust.
At the same time, the costs of servicing all that debt have also exploded and are also contributing to the deficits, creating a debt feedback loop. Interest costs on the debt now amount to $1 trillion a year and are among the largest budget items, even exceeding defense spending.
Given the trajectory of US debt, Pimco has highlighted three alternatives it prefers:
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Instead of long-term bonds that are particularly sensitive to Fed rates, the country prefers short- and medium-term maturities that offer investors attractive returns without greater interest rate risk.
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Pimco diversifies its interest rate risks globally and highlights UK and Australian government bonds in particular, calling them high quality issuers with a stronger fiscal position than the US.
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The bond giant also favors lending to higher quality companies in public and private markets.
The Pimco bond coincided with a steep rise in ten-year government bond yields last week. It stood at about 4.14% early Monday, but rose to almost 4.4% on Friday, fueled in part by a higher-than-expected producer price index on Thursday.
Despite a widely expected Fed rate cut this coming week, Wall Street has scaled back forecasts for future cuts as other policies from the incoming Trump administration are seen to increase inflation.
“At the same time, we have become more cautious about longer-term lending given questions about the sustainability of U.S. debt and potential inflation catalysts such as tariffs and the effects of immigration restrictions on the labor force,” Pimco said. “The US is still in a unique position because the dollar is the global reserve currency and government bonds are the global reserve. But at some point, if you borrow too much, lenders may doubt your ability to pay it all back. take a vigilante to point that out.”
This story originally appeared on Fortune.com
