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PIMCO's Bill Gross "Which Way For Bonds?"
Authored by Bill Gross via PIMCO,
Why Way For Bonds? Mapping A Path Forward.
Q: Can you explain what is happening in markets now?
Gross: In 1980, the Federal Reserve, led by Paul Volcker, tightened the quantitative noose to tame double-digit inflation, fueling an unprecedented tailwind for bond prices. Thirty years later we find ourselves at the other extreme, as central banks print money in the trillions of dollars to stimulate economic growth, and inflation is abnormally low. While we are not likely to see a repeat of that type of bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds. Rather, what we’re seeing is the continuation – and acceleration, in some respects – of the de-levering process, a key distinction that may be getting lost in some of the noise over the past few weeks. The Fed, the Bank of England, and now the Bank of Japan have all committed to holding their easing stance until growth targets are hit. We don’t see the Fed raising rates in a meaningful way for at least the next few years.
That said, we believe caution is warranted not just for fixed income investors, but for investors in all risk assets. Central banks have reached a critical inflection point in which the negatives of their aggressive policies may be outweighing the positives and in fact hampering growth. Where their monetary repression has succeeded, however, is in forcing investors to take increasing amounts of risk, but for lower yields and more volatile returns.
Gross: In 1980, the Federal Reserve, led by Paul Volcker, tightened the quantitative noose to tame double-digit inflation, fueling an unprecedented tailwind for bond prices. Thirty years later we find ourselves at the other extreme, as central banks print money in the trillions of dollars to stimulate economic growth, and inflation is abnormally low. While we are not likely to see a repeat of that type of bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds. Rather, what we’re seeing is the continuation – and acceleration, in some respects – of the de-levering process, a key distinction that may be getting lost in some of the noise over the past few weeks. The Fed, the Bank of England, and now the Bank of Japan have all committed to holding their easing stance until growth targets are hit. We don’t see the Fed raising rates in a meaningful way for at least the next few years.
That said, we believe caution is warranted not just for fixed income investors, but for investors in all risk assets. Central banks have reached a critical inflection point in which the negatives of their aggressive policies may be outweighing the positives and in fact hampering growth. Where their monetary repression has succeeded, however, is in forcing investors to take increasing amounts of risk, but for lower yields and more volatile returns.
Q: When do you expect the Fed to begin to take its foot off the QE pedal? Are rising rates a concern?
Gross: The Federal Reserve has cited an unemployment rate of 6.5% as its threshold for pulling back on monetary policy. At the same time, Chairman Bernanke wants to avoid the mistake of premature tightening, as occurred disastrously in the 1930s. While we agree with this reasoning, we are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors. The Fed shares these concerns as well, which is why some members are considering a reduction or tapering of purchases. From a technical perspective, the Fed may also be forced to taper its purchases to match the shrinking U.S. budget deficit. But there’s a difference between a mild reduction and a decision by the Fed to materially scale back its bond purchase program. The economy has yet to achieve escape velocity, and unemployment is still stubbornly high and structural in nature. So while we may see some tapering, possibly by the end of the year, we do not expect the Fed to remove the trough for some time or for this to signal a dramatic increase in rates. Rates will fluctuate over the shorter term, of course, and it’s our job as active managers to effectively position our clients’ portfolio if that occurs. This is something we have done for our investors for decades.
Q: How are you positioning Total Return to navigate this environment?
Gross: While it’s natural to want to reach for higher returns, an investment strategy’s success depends on carefully weighing potential rewards against the long-term costs, using the insights you’ve gathered on the ground and on a macro level through rigorous analysis. Today, given the economic uncertainty and rich market valuations, we think that the fortitude to wait for more attractive opportunities is a valuable attribute. Our goal for the Total Return strategy is to enhance our dry powder, seek prudent alpha and reduce risk – not dramatically, but to average or slightly below-average levels. Fortunately, PIMCO has a wide array of tools at our disposal to accomplish that. So, among other things, we’re avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors, managing volatility and increasing exposure to countries with higher-quality balance sheets such as the U.S., Brazil, Mexico and Australia. And we are seeking out and taking advantage of opportunities in the market. For example, we believe intermediate Treasuries are currently attractively priced at around 2%.
Gross: The Federal Reserve has cited an unemployment rate of 6.5% as its threshold for pulling back on monetary policy. At the same time, Chairman Bernanke wants to avoid the mistake of premature tightening, as occurred disastrously in the 1930s. While we agree with this reasoning, we are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors. The Fed shares these concerns as well, which is why some members are considering a reduction or tapering of purchases. From a technical perspective, the Fed may also be forced to taper its purchases to match the shrinking U.S. budget deficit. But there’s a difference between a mild reduction and a decision by the Fed to materially scale back its bond purchase program. The economy has yet to achieve escape velocity, and unemployment is still stubbornly high and structural in nature. So while we may see some tapering, possibly by the end of the year, we do not expect the Fed to remove the trough for some time or for this to signal a dramatic increase in rates. Rates will fluctuate over the shorter term, of course, and it’s our job as active managers to effectively position our clients’ portfolio if that occurs. This is something we have done for our investors for decades.
Q: How are you positioning Total Return to navigate this environment?
Gross: While it’s natural to want to reach for higher returns, an investment strategy’s success depends on carefully weighing potential rewards against the long-term costs, using the insights you’ve gathered on the ground and on a macro level through rigorous analysis. Today, given the economic uncertainty and rich market valuations, we think that the fortitude to wait for more attractive opportunities is a valuable attribute. Our goal for the Total Return strategy is to enhance our dry powder, seek prudent alpha and reduce risk – not dramatically, but to average or slightly below-average levels. Fortunately, PIMCO has a wide array of tools at our disposal to accomplish that. So, among other things, we’re avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors, managing volatility and increasing exposure to countries with higher-quality balance sheets such as the U.S., Brazil, Mexico and Australia. And we are seeking out and taking advantage of opportunities in the market. For example, we believe intermediate Treasuries are currently attractively priced at around 2%.
...
Q: With bond markets so uncertain, what steps can investors take to ensure they’re prudently pursuing their financial goals?
Gross: It’s important for investors to remember the reasons they own bonds in the first place – namely for the potential for the preservation of capital, income and growth, relative steadiness and typically low to negative correlations with equities. These needs – which will only become more urgent as millions of baby boomers head to retirement over the next decade and a half – are long term, regardless of what markets are doing today. So fixed income should always have a place in a portfolio. Still, there are ways to navigate challenging markets without feeling stuck. One is to expand your investment universe by going global.
Q: With bond markets so uncertain, what steps can investors take to ensure they’re prudently pursuing their financial goals?
Gross: It’s important for investors to remember the reasons they own bonds in the first place – namely for the potential for the preservation of capital, income and growth, relative steadiness and typically low to negative correlations with equities. These needs – which will only become more urgent as millions of baby boomers head to retirement over the next decade and a half – are long term, regardless of what markets are doing today. So fixed income should always have a place in a portfolio. Still, there are ways to navigate challenging markets without feeling stuck. One is to expand your investment universe by going global.
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Ohhh I don't know Mr. Bond, CIO of PIMCO.. Why don't you indulge us?
how will a large scale war in the ME affect bond prices?
Key word here: distortion.
So much for free markets.
Damn Bill, just call it a zombie market for bonds and get it over with.
Bonds are going to be wiped out and Gross pretends there is some kind of strategy for investing in bonds.
Gross won't be remembered well.
but he was well paid for it...
2 and 20 all day long no matter what happens!
"Do you expect me to talk?"
"No, Mr. Bond, I expect you to DIE!"
They'll probably rise I believe. In such a situation, the US, despite all its flaws, works as a safe haven.
We get much better bond market information from Fonz, so screw Gross.
And of course, the Fed.
I'm surprised he didn't tweet with all the cute emoticons.
And BTW, did he just have a conversation with himself?
Huh?
What do you sell for a living again?
He sells any product for which his brand of muppet will pay a commission; results be damned.
He know where the butter for his bread comes from.
I could be wrong but wasn't there a report recently that showed his long duration holdings were still near an all-time high?
The only low inflation is for Made in China items. I just don't get the delusion.
He's saying "there's a lot shit in a bubble right now. Take a wild guess which of these is allowed to pop: bonds (the primary way of funding the government and the international leveraging collateral instrument), equities (which have been sold relentlessly if you look at insider transactions), real estate".
Excuse me for a moment, this guys hand up the back of my shirt is starting to chafe.
Rough from counting chickens before they are hatched.
Drumming up rotational buyers so the "smart" money can bail perhaps.
PIMOCCHIO, I get it.
Too subtle for Friday maybe, but I liked it. +1
Bill Gross, you're napalm; you write with your fist, but it's Tyler's arm.
Gross (on bonds): "for the preservation of capital, income and growth".
Gee golly, that sounds super easy. Bonds are risk free! Why didn't we all figure this out a long time ago?
Seriously, what a bunch of horseshit from this guy.
Well, a bear market is some ways off.
The price of 10yr is 5% and the 30yr 8% off a recent 100-200-year high.
But in a free money life support for bonds environment that can change overnite.
We still don't know what QE is here and Bill Gross does not enlighten us here either. We only know "it's a Government program" and while it has been good for equities clearly...and unlike what was presented here...this program was designed to hammer those interest rates to zero so our Government wouldn't go bankrupt over nite as was a real possibility in 2008. Since the program had other beneficial effects (no double dip depression, interest rates did in fact decline, the equity space, real estate and other "securitized products" soared in value) there really is a "too good to be true" or "suspension of disbelief" quality. I admit to buying into it. I have no idea why. All I can say is "it's temporary."
Which way for bonds? Well, that entirely depends on outguessing the Fed Maniacal Monetizers...good luck with that.
Bill has finished taking profits for now.
He wants others to sell into his buying.
The U.S. has a "high quality balance sheet" ?!? What's Bill smoking these days, and where can I get me some?
see. This statement, we are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors, is patently false, in my opinion. Where, for example, have the incentives for taking inordinate risk been de-incentivized? Fuck where? show me? If anything QE has totally incentivized the propensity to take on risk becuase the cost to borrow to do so, and the return from savings are essentially zero. To be sure, if he were to clarify the composition of the risk taken, such as durable risk (risk taken for commitments to productive welfare enhancing activities), then I would agree, because, nobody is lending for that, and nobody is borrowing for it, becuase there is no market for it, because nobody has any moeny becuase nobody's working. However, the speculative risk taken is huge, which as John Hussman demonstrated, is not durable or sustainable.
Gross talks out of both side of his mouth.
Question is if I am that stupid or Bill Gross that smart? Because he also must know that even small increases in interest rates make the debt so much more expensive and that the whole QE game turns around keeping rates low while devaluing the dollar. There’s too much leverage.
What Bill Gross is saying (and maybe not thinking) that he full-heartedly buys into Bernankesan's 'Oeh! Scare you/I am gonna taper' story while he must know that the FED painted itself into a corner by taking over all markets with QE. Bernankesan just has realized that he indeed is the captain and only captain of a TBTF ship. What he hasn't found out yet is that his ship has severe leakage and it's name is ... Loan Boat http://www.youtube.com/watch?v=mSFb3ItC2QA
Fed Taper Fear Stalks World Financial Markets: Cutting Research
http://www.bloomberg.com/news/2013-06-12/fed-taper-fear-stalks-world-financial-markets-cutting-research.html
Question as always is; how much more expensive?
Jim O’Neill Says Get Used to U.S. Yields Nearer 4% Than 2%
http://www.bloomberg.com/news/2013-06-11/jim-o-neill-says-get-used-to-u-s-bond-yields-nearer-4-than-2-.html