| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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What the bond guru sees coming |
Money Magazine - July 20, 2010 - by Pat Regnier
Bill Gross, co-chief investment officer of Pimco and manager of the planet's biggest bond mutual fund, has some so-so news and some bad news.
First, the so-so: Inflation and higher interest rates aren't a huge threat in the near future, so all those U.S. government bonds you may have been investing in recently are okay for now.
The bad news? The world economy is still in lousy shape. At best, investors can expect a "new normal" era of slow growth and lower returns on stocks, bonds, and everything else.
Actually, Gross's case for the new normal isn't all that new. He was predicting a long era of weak returns well before the financial crisis kicked in. Gross isn't always spot-on in his public calls: He was dissing now hot Treasuries as recently as April.
Still, he has consistently crushed most of his competition. Harbor Bond fund, the Money 70 pick that's a cheaper near clone of his flagship Pimco Total Return, has delivered a 7.5% annualized return over the past decade. That's compared with 5.4% for the average intermediate-term bond portfolio. Gross spoke in mid-June with assistant managing editor Pat Regnier at Pimco's offices in Newport Beach, Calif. Edited excerpts follow.
A lot of people, including Money's editors, worry that there's a bubble in the bond market, especially in Treasuries. What's your take?
The right time to ask that question would have been in the beginning of 2009. That's when we were in the throes of the big-R recession, and the 10-year Treasury was paying just over 2%. [When bond prices rise, their yields fall.] So it was certainly a bubble then. It's less bubbly now. At a yield of around 3.1%, Treasuries are fairly valued, considering the low expected inflation and slow growth ahead. Investors are finding it hard to get used to such a low yield. But they're going to find it hard to get used to the slow growth -- or what we at Pimco call the "new normal" -- throughout the economy. In that context, a 3.1% yield is okay. It's a milquetoast valuation.
You've recently shifted money back into Treasuries. What changed?
We've recognized that there's a flight to quality, to safe-haven assets. That's because of very slow growth worldwide and financial market chaos. We're having a mini-replay of 2008. Money is fleeing from countries like Greece. Everyone is trying to find what we call the least dirty shirt. And the U.S. is the least dirty shirt. As Will Rogers said, "I'm not so much concerned about the return on my money as the return of my money." In this market, return of money is beginning to become a dominant theme.
A lot of our readers look at the U.S. debt and the Fed's stimulus efforts, and they wonder whether even Treasuries can be safe. Shouldn't we be worried about inflation and higher rates?
That's legitimate. It's not just the deficit, which is around $1.5 trillion and 10% of the economy now. It's also entitlements. Health care is a huge cost that's going to hit the table in the next few years as the boomers age. And at some point even the cleanest dirty shirt is going to come under scrutiny by investors.
But at the moment the U.S. is the reserve-currency country. We have a comparatively low debt-to-GDP ratio. The whole world got hooked on debt -- not just subprime homeowners but governments.
We ask ourselves every day, "If we had to invest our $1.1 trillion somewhere and we didn't like the U.S., where could we go?" Canada and Australia are in decent shape. Germany has been okay but is starting to get infected by Europe's troubles. Overall, the U.S. is still the clearest pond in the forest.
You will probably be the first for the exits if Treasuries seem about to lose their safe-haven status. It's harder for the rest of us to time those shifts. Should individuals be as comfortable as you are buying Treasuries?
Not really. As a group, combining long- and short-term bonds, the yield is just 2%. And as you note, their safe-haven status can only go down over time.
What about the possibility of deflation occurring?
We're in a struggle between inflation and deflation right now. We may never get to a negative consumer price index, but the danger is a drop in asset prices and the destruction of credit. It means corporate bonds defaulting because companies aren't getting enough business and they can't pay off their debts. It means foreign governments defaulting. It's individuals with mortgages who can't get out from under their 16 tons of debt. The economy can't recover, and unemployment stays high. Stocks would be in trouble because some companies would be going bankrupt while others couldn't get the credit they need to grow.
So which is the bigger risk now -- inflation or deflation?
Our investment committee has sketched out four possible scenarios. Scenario A is that the global economy rebounds back to past levels of high growth. B is just a decent rebound. C is that new normal -- half-sized growth. And D is deflation, debt, destruction. I'd say we're at a C -- right now. We believe in the new normal, but what we're seeing in Europe puts the minus on that C grade.
What does the "new normal" mean for our readers?
Instead of 10% returns for stocks, look for five or so. And instead of the past 20 years' returns on bonds, which are actually better than stocks -- close to double digits -- it's 4% going forward. So that's what the new normal is. And it's based upon the primary assumptions of a deleveraging of the private sector and the public sector being limited in what it can spend.
If stocks might return just a percentage point or two over bonds, does that justify the risk?
Barely.
Why is it so hard to get growth going?
The lack of what economists call aggregate demand. So much of the world's growth and financial surplus have shifted to Asia, where people are fixated on saving instead of buying. Consumption in China is just 35% of GDP, half our rate.
What should investors make of the Fed's policy of keeping rates close to zero?
The Federal Reserve wants your readers and Pimco to make a choice. You get almost nothing if you hold short-term Treasury bills. The Fed wants you and Pimco to buy the assets that were depressed 18 months ago -- stocks, high-yield bonds, etc. -- to restimulate the economy. Because this economy has been based on asset appreciation.
For the complete article visit CNNMoney.com
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Income Security Recommendation January 2013 Issue.
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