Treasury prices and yields

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CHICAGO (CNNMoney) — Pimco founder Bill Gross reiterated his warning to cash out of Treasuries Wednesday afternoon.

Investors who have been betting on Treasuries are destined “to get cooked like frogs in an increasingly hot pot of water,” the well-known bond bear told attendees at a Morningstar Investment conference in Chicago.

Gross, who manages the $235 billion Pimco Total Return Fund (PTTAX), said real interest rates, which remove the effect of inflation to measure the actual yield an investor receives, have fallen into negative territory.

He pointed out that Treasury inflation-protected securities with a maturity of 5 years are trading at a yield of -0.5%. In October 2008, the 5-year TIPS’ real interest rate stood at 4%.

Why Pimco cut its bond holdings

Given the “staggering” drop in yields and the fact that, on a historical basis, they are low, Gross said interest rates can’t sink much further “absent a potential crisis in the dollar.”

Earlier this year, Gross slashed Pimco’s exposure to Treasuries to zero and placed short bets against U.S. debt. He also put about a third of the fund’s assets into cash.

“The dramatic influence of high real interest rates simply isn’t there anymore,” he said.

And ultimately, the Fed’s policy of keeping interest rates low through several programs including its purchase of $600 billion in Treasuries, or QE2, will have consequences. One of those will be higher interest rates…and that could hurt the economic recovery, which has already been showing signs of slowing down, Gross said.

For investors hell bent on investing in debt, Gross says to look overseas.

“Treasuries are only half of the bond market,” Gross said. “Look in countries where monetary policies are less repressive.”

He said that Brazilian debt offers real interested rates between 6% and 7%, and Canada, Mexico and Germany also offer better deals on their bonds. To top of page

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