You may have heard or read that PIMCO increased its government bond allocation in its flagship PIMCO Total Return Fund (MUTF:PTTRX) to 50% from 41% in the month of May.
What's the takeaway from this?
I would not view this as a leading indicator. Prior to May, Bill Gross, PIMCO's co-founder and managing director, had been on TV touting the idea of a 2% neutral Fed Funds rate. His talking point was repeated in his May investment letter and the firm's secular outlook report on the same topic. The increased allocation was done prior to the commentaries in order to capture the market's renewed attention on the subject -- not to mention the fallout from former Federal Reserve Chair Ben Bernanke and his comments during his dinner circuit, when he also discussed a significantly lower neutral Fed Funds rate.
So, PIMCO has already taken this trade -- so to speak -- and I've seen evidence that it locked in gains through Eurodollar put structures last week, if not by outright selling some of these holdings (MBS and Treasuries).
More importantly, PIMCO sees the "New Neutral" -- the view that global economies will converge to modest trend growth rates -- as a bullish catalyst for gold and other precious metals. The real overnight rate will be at around zero in the future, and real Treasury interest rates may remain at zero or lower, which will reduce, or even remove, the opportunity cost of holding non-yielding assets like gold or silver. Check out the latest comments (#2 and #3) from deputy CIO Mihir Worah on the subject.
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