(Bloomberg) -- Pacific Investment Management Co. says it’s “less inclined” to purchase Treasuries with extended maturities in light of ballooning US deficits, shooting across the bow of a profligate Washington.
The Newport Beach, California-based bond investor, which manages $2 trillion in assets, has been “reducing allocations to longer-dated bonds,” preferring short-to-medium dated Treasuries, managing directors Marc Seidner and Pramol Dhawan wrote in a paper released Monday.
“Over time, and at scale, that’s the kind of investor behavior that can fulfill the bond vigilante role of disciplining governments by demanding more compensation,” they wrote.
Unease about the growing US debt pile sparking higher long-dated Treasury yields has become a flashpoint as the amount of marketable government debt has surged from a pre-pandemic level of $17 trillion to nearly $29 trillion.
The prospect of the so-called bond vigilantes repeating their behavior of the 1980s and early 1990s and aggressively selling Treasuries in response to heavy fiscal spending is top of mind among investors, with tax cuts a priority on President-elect Donald Trump’s agenda.
“If you’re seeking clues about the potential for bond vigilantism, you might start by asking the largest fixed income investors – who theoretically hold the most market sway – what they’re doing,” Seidner and Dhawan said.
“Predicting sudden market responses to long-term trends is difficult,” they wrote. “There is no organized group of vigilantes poised to act at a specific debt threshold; shifts in investor behavior typically occur at the margin and over time.”
Climbing yields on the benchmark Bloomberg US Aggregate Index show evidence of bond investors adopting a stance of “vigilance before vigilantism.” The yield rose above the federal funds rate in November for the first time in more than a year.
While that shift gave bonds more attractive yields than cash, Pimco said it has “become more hesitant to lend longer term given US debt sustainability questions and potential inflation catalysts, such as tariffs and the effects of immigration restrictions on the labor force.”
In contrast, Pimco said “the UK and Australia exemplify high quality sovereign issuers with stronger fiscal positions than the US. They face greater economic risks as well, which can benefit bond investors.”
As recently as last month, the Federal Reserve ranked US debt sustainability as the biggest concern among survey participants in its semiannual financial stability report.
Other large asset managers such as BlackRock Inc. are also wary of rising US spending and expect steeper curves and higher long-dated Treasury yields.
Pimco acknowledged that the US is a unique sovereign borrower given the dollar and Treasuries act as the “global reserve” currency and asset, respectively. Still, they caution: “At some point, if you borrow too much, lenders may question your ability to pay it all back. It doesn’t take a vigilante to point that out.”
For that reason, Pimco said “rising sovereign debt has become a greater factor” in its decisions about adjusting allocations across the yield curve.
Heading into 2025, the outlook for US Treasuries is for the “yield curve to steepen, fueled in part by deteriorating deficit dynamics,” and “that implies a relative rise in yields for longer-term bonds.”
©2024 Bloomberg L.P.