US - The debt of struggling US states and municipalities will prove to be attractive investments in the coming year as they benefit from federal aid, Bill Gross, chief investment officer at PIMCO has said.
About Federal spending, he said: "An Obama administration will quickly be confronted by the need to provide those hundreds of billions of dollars to states and large municipalities."
President-elect Barack Obama will not likely ignore states in need. Gross added: "Their requests total nearly a trillion dollars and to think California or NYC would be allowed to fail is, well - unthinkable."
Municipal bonds are a good alternative to 2.5% 10-year Treasury bonds for investors looking for defensive investments, he said.
For the past six months, PIMCO has been funnelling money into government backed-securities like bank preferred stock, senior bank debt and Aaa asset-backed securities.
Gross said: "PIMCO's view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond. Anticipate, then buy what they buy, only do it first."
TIPS, on the other hand, won't receive much attention from the government in the next year, but can still offer returns. "…They can benefit if and when the government's efforts to reflate begin to take hold. Two and a half percent real yields cannot possibly be maintained unless deflation as opposed to inflation becomes the odds-on favourite," he said.
Investors would also be loath to ignore high quality corporate debt. Corporate bonds in many markets will still offer yields of 6% or more for intermediate maturities, he said.
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