Wednesday, October 27, 2010

Bill Gross on Bonds: Fed Easing Will Likely End Bond Bull Market, Gross Says

I mentioned the commentary of Ambrose Evans-Pritchard earlier today, and posted the note from Jeremy Grantham yesterday, so it seems only fair that I let you see what Bill Gross from Pimco is saying.

I still think that interest rates will move lower before they can move higher.

Now, I know what some of you are thinking: the yields in the bond market have been spiking higher recently. 10 year Treasury bond yields are now back above 2.70%, after touching 2.39% earlier this month. But don't forget that the yield on the 10 year was 2.80% in early September, and hit 4% in early March 2010, so we are really tracing some of the earlier decline. It is hard to see how interest rates soar when the Fed is committed to keeping interest rates low, probably through at least the end of 2011.

Still, Bill Gross has been The Man in bonds for many years, so he bears a listen (excerpt from Bloomberg):

“Check writing in the trillions is not a bondholder’s friend,” Gross wrote in his monthly investment outlook posted on Newport Beach, Calif.-based PIMCO’s Web site today. “It is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up.”

“We are, as even some Fed Governors now publically admit, in a ‘liquidity trap,’ where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there,” Gross wrote. “Escaping from a liquidity trap may be impossible, much like light trapped in a black hole.”

Under what PIMCO calls the “new normal,” investors should expect lower-than-average historical returns with heightened regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

“If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity,” Gross wrote.

Fed Easing Will Likely End Bond Bull Market, Gross Says