Even the experts disagree on bonds
Pimco's Bill Gross has been cutting his holdings of Treasury securities for the last three months, while BlackRock's investment strategist takes a more positive view.
Looking for guidance on how to play the bond market in this low interest rate environment? Don’t look to the pros -- even they can’t seem to agree which is the worse threat, interest rate risk or credit risk.
On the one hand, Pimco's Bill Gross has been cutting his holdings of Treasury securities for the last three months. In his view, the risk is that the country's fiscal problems and the endless flow of stimulus money from the Federal Reserve will ultimately come back to haunt us in the form of inflation -- and much higher interest rates -- in the long run and erode investor confidence in Treasury bonds in the meantime. Unless the country addresses its fiscal situation, Gross argued in his October investment outlook, bonds will get "burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the 'Ring of Fire.'"
On the other side, Jeffrey Rosenberg, the chief investment strategist for fixed income at BlackRock Investments, takes a more positive view of Treasury securities, at least in the short run. In a report to clients published this week, Rosenberg said he would suggest scaling back exposure to credit risk (in the form of corporate bonds) and mortgage-backed securities while increasing exposure to Treasuries, at least on a tactical basis.
The two aren’t debating the relative merits of their views face to face on national television like the presidential and vice-presidential candidates, but just as those politicians have done, the money managers illustrate a division of opinion over just how to approach what is an increasingly frustrating fixed-income market.
No one is eager to fight the Fed -- and the central bank’s policymakers have made it crystal clear that they have no intention whatsoever of raising interest rates before 2015. Former Fed chairman Alan Greenspan tried to sway markets, and sometimes succeeded. Ben Bernanke’s Fed doesn’t have any intention of waiting to see whether the market will be persuaded.
So, if low interest rates are going to remain a fact of life for bond investors, what’s the right strategy? Some bond market veterans point out that even in an ultra-low rate environment, it’s still possible to generate returns. The declines in interest rates may not be as dramatic in absolute terms, but a move from 1.72% to 1.68% in yield is still a 2.3% decline that will generate a reasonable risk-adjusted return for investors in the 10-year Treasury note.
Anything that causes fear to rise in global markets will drive investors back toward safe haven investments like Treasury securities and push yields lower and prices higher. A move of just a few basis points today can have a similar impact to that of half a percentage point two years ago, as one bond investor pointed out to me recently.
Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.
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