Pimco issues bond warning

Pimco said that the additional premium demand by investors holding long-term bonds could have serious consequences for financial markets. According to Pacific Investment Management Co, one of the world's largest bond funds, the "budget splurge" in the US could cause a revival of the high additional yield demand seen in the 1980s in bond markets. According to Pimco CIO Marc Seidner, persistent inflation and deteriorating budget forecasts could reverse a 40-year trend of decreasing additional premium demand for long-term bonds. "What happens if we have a 'back to the future' scenario where investors demand a higher premium to hold long-term?" Seidner asked in his article. "If the additional premium demand for long-term bonds increases to 200 basis points as it did in the late 1990s and 2000s, this could be a turning point for financial markets. In this case, it would not only affect bond markets. It could also affect stocks, real estate and many other assets," Seidner said. The additional premium Seidner mentioned is defined as the additional return investors demand in exchange for holding long-term bonds instead of rolling over short-term securities as they mature. According to the model developed by the New York Fed, the additional premium demanded for 10-year bonds remained negative for a significant period after the 2008 crisis and continues to be slightly negative today.