Bond Market Themes This Week

What is the bond market focused on this week? One item that has really turned some heads recently was the letter from PIMCO’s Bill Gross, stating that its Total Return Fund sold all of its Treasury holdings. Mr. Gross has been right and wrong in the past. One quote said, “PIMCO’s not sticking around to see what happens when QE II ends” in June. Currently 70% of the Treasury’s annual bond supply is being gobbled up by the Fed through quantitative easing – what happens if the purchases stop? Even with the turmoil around the world there is little “Flight to Quality” bid for US Treasury debt because the Fed is “busy printing dollars to create Inflation to solve our own debt crisis.

Investors are also worried about the potential impact on global recovery the event in Japan could produce. Japan is the world’s 3rd largest economy, the 4th largest exporter, 3rd largest importer of oil and 5th largest importer overall, so concerns are running high – Japan’s debt is already at 200% of GDP. Even before the earthquake, Japan’s economy had been struggling to recover from deflationary pressures and investors are concerned the government has little room to borrow the funds needed to support massive rebuilding efforts. Look for rebuilding projects to eventually be supportive to economic growth, as disaster cost estimates are nearing $200 billion. Look for central banks worldwide to keep liquidity flowing into the system, as they work together to ensure economic growth and Japan are supported.