3 reasons why bond investors have to chill
Pimco executive explains why yields will move lower.
Bond investors are sweating bullets. In 3½ months, the 10-year yield has risen from about 1.6% to over 2.9%, before cooling off in recent days. And on Thursday, bond expert Jeffrey Gundlach made the case that the 10-year yield could reach 3.1% by end of the year.
As yields rise, bond prices fall, so the move in yields has been very painful for those who have owned bonds, and investors are heading for the exits. Bond funds (such as PIMCO Total Return ETF (BOND) and iShares iBoxx $ High Yield Corporate Bond (HYG) saw outflows of $36.5 billion in the first 22 days of August, according to TrimTabs. Bond giant Pimco saw $7.4 billion worth of outflows in July alone, and double that in June.
But Tony Crescenzi, Pimco executive vice president, market strategist and portfolio manager, believes that the bearishness has gotten overdone. On CNBC's "Futures Now" on Thursday, he made the case that "yields will move lower from here," and he provided three reasons why.
1. Economic fundamentals don't support these yields
Crescenzi said that yields could rise a bit more due to technical reasons, but the fundamentals don't support it.
After all, "what's priced into the bond market is the idea that the economy, in 2014, will accelerate," Crescenzi said.
But he throws cold water on the rosy economic picture that some are drawing. "Bond investors will begin to reassess whether or not the optimistic forecasts, including the Fed's own forecast, will come true."
Indeed, many have questioned the accuracy of the Federal Reserve's forecast for 3 to 3.5% GDP growth in 2014. On Tuesday, Krishna Memani, OppenheimerFunds' chief investment officer of fixed income, said on "Futures Now": "The economic growth that we're looking for in the Fed's forecasts is probably a bit overstated," and for that reason, he, too, sees rates dropping.
2. Inflation is not coming back
While Gundlach compared the recent rise in rates to the rate rally in 1994, Crescenzi said the present situation is markedly different.
"What 1994 was about was the last big battle against inflation expectations," Crescenzi said. "When the economy began to accelerate from the 1991 recession, people started to say, 'Well hey, more growth means more inflation. Why can't the inflation rate get back to 4 and 6% again?' Then Alan Greenspan came in and stomped on the bond market with big rate hikes to say there isn't going to be an inflation acceleration like there used to be in the '70s and '80s."
Because "that inflation battle has been fought," the Fed doesn't need to hike rates in order to tamp down the rate of economic growth and thus reduce inflation, according to Crescenzi. That means that a full repeat of the 1994 bond catastrophe -- in which yields rose nearly 2 percentage points in three months -- is unlikely.
3. Investors are misreading the Fed
Crescenzi believes there's an "80% chance" that the Fed will begin to taper its qualitative easing program in September. But he thinks investors are misreading when the Fed will raise their Federal funds rate.
Again, because the Fed doesn't need to worry about inflation expectations getting out of hand, Fed Chairman Ben Bernanke has no need to hike short-term rates as Greenspan did. "Unlike 1994, there won't be rate hikes to reinforce the rise in interest rates," Crescenzi said. So according to Crescenzi, "there won't be a rate hike until 2015 and the earliest, and we think 2016."
Any rise in rates would be investor-directed, then -- and since the economy will not be as good as investors expect, he does not expect to see rates get pushed higher.
In fact, by the end of the year, this bond guru sees rates falling back to the low to mid 2s on the 10-year.
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And most of us know that yields will indeed climb further. The propensity for inflation in the US is scary. Mainly just in energy and food recently... but once the Fed realizes it must print more to not unwind the previous Keynesian effects of printing, watch out. Maybe that is why gold was on a recent rally. I don't know. But equities are in for quite a spanking -- with yields rising on treasuries, it just might make more sense buying these once yields rise futher as opposed to low dividend paying risky assets like equities with probable price correction to boot. We shall see.
We are still on a plotted course for Dow 14,000 and S&P 1,550 by September 18th...
But after that date, it could be like the HMS Bounty off a waterfall.
Whilst I respect PIMCO's opinions, have they honestly figured in Federal Reserve monetization of sovereign debt? The loss of the Petrodollar? The loss of the USD as the world's reserve currency? The deluge of public debt that either needs to be serviced in perpetuity or simply inflated away?
Similarly, a country does not need rampant economic growth for inflation... stagflation comes to mind.
Wait a minute... you invested in bonds thinking you could take the scenic route past the biggest CON GAME in history and be... unaffected? IDIOTS. What have your bonds accomplished? How many of you estimated the toxicity content (fiat printed and phony derivative monies) in them? You know when Charles Schwab brokers jumped up and down PROMISING the Euro Currency Funds they promoted were entirely American Subprime Debt Free... but that Class Action Suit proved what commonsense had surmised originally-- IMPOSSIBLE. It's IMPOSSIBLE that your bonds have a rat's chance of any fulfillment because the ENTIRE financial structure is predicated on instruments without substance or substantiation. YOU LOSE, even if you bought the luxury ticket.
3 reasons this guy sucks
1. inflation has been here never mind coming back.
2 The Fed does need to worry about inflation
3 This guy must be jewish banker
the banks recognized record earnings for the past quarter, yet the federal reserve is still paying them interest on deposits. if the fed stops doing that, banks would have to increase their loan production. the fed has also purchased something like 80% of all us governments bonds. there is no substantive reason for them to do so other than increase the money supply. ultimately interest rates will go up. that will hurt bonds in the near term. there are not many options. interest rates have plummeted over the last 25 plus years and that part of history is over. buying longer dated bonds could not be a worthwhile undertaking for the average individual. my guess is that mr gundlach is closer to right than tony c at pimco
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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