QE2

Awhile back I highlighted the selling of US Treasuries by Bill Gross in PIMCO's total return fund. The latest edition of The Economist magazine picks up on the story and its implications. Why should we care? When the manager of the world's largest bond fund is avoiding US Treasuries, we should ask why?

"Mr. Gross is particularly worried about the effect of quantitative easing by the Federal Reserve, the second round of which is due to expire in June. PIMCO reckons the Fed has been responsible for 70% of recent Treasury purchases. Who will by Treasuries when the Fed doesn't? The danger is of a spike in bond yields as private investors demand a higher return to compensate them for the risks of inflation or dollar depreciation.

Now the end of QE2 has been well signaled. Markets have had time to adjust. Nevertheless, it is legitimate to worry whether getting out of a QE program will be as easy as getting into it (and this is a problem the Bank of England and the European Central Bank face as well). In what circumstances would investors be most keen to buy more government bonds?"

GB