The Pacific Investment Management Company, LLC (PIMCO) runs, amongst many others, the world’s largest bond fund, the Total Return Fund ($185.6 billion as of last September). PIMCO say this fund is “a core bond portfolio strategy that seeks maximum current income and price appreciation consistent with the preservation of capital and prudent risk taking”.In what amounts to a massive vote of no confidence PIMCO has announced that it will cut back on its UK and US government debt holdings. They see government borrowing rising and the central banks no longer buying through quantitative easing, which will push the supply / demand balance into negative territory for them. They are expected to move into European government bonds as these have not had the same level of government support.
Apart from the economic repercussions for Britain, it also embarrassingly appears that Andrew Balls (younger brother of Ed Balls, Secretary of State for Children, Schools and Families) will be overseeing this withdrawal as head of PIMCO’s European investment team.
If a flood of UK Gilts are dumped on the market we could see yields rise (prices drop) more than anticipated.
This leaves the questions of where will the government raise the circa Â£180 billion it needs for the next year? And how much more of a premium in the form of increased bond coupons (interest) are we going to have to offer before investors are happy to take the risk of buying new Gilts? Also, when will the Bank of England be able to sell its accumulation of Gilts back into the markets without suffering a massive loss?
Next stop the IMF?