The Fed’s statements have convinced legendary Bond Fund Manger Bill Gross that its time to get out of bonds. That means getting into something else. Emphasis in the original
We will tell them this. Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers. We haven’t been around for 35+ years and not figured out a way to avoid the November axe. We are a survivor and our clients are not going to be Turkeys on a platter. You may not be strutting around the barnyard as briskly as you used to – those near 10% annualized yields in stocks and bonds are a thing of the past – but you’re gonna be around next year, and then the next, and the next. Interest rates may be rock bottom, but there are other ways – what we call “safe spread” ways –to beat the axe without taking a lot of risk: developing/emerging market debt with higher yields and non-dollar denominations is one way; high quality global corporate bonds are another. Even U.S. Agency mortgages yielding 200 basis points more than those 1% Treasuries, qualify as “safe spreads.” While our “safe spread” terminology offers no guarantees, it is designed to let you sleep at night with less interest rate volatility. The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.
A couple of things are happening. Gross is moving money offshore. That means the dollar will decline, which we have discussed before. This will be stimulating for the US economy.
Second Gross is moving into corporate debt and agencies (housing). There are one of two possibilities.
- Corporations will actually take Gross’s money and so will homeowners. Businesses will hire and home building will perk up. We’ll party like its 2005. I consider this the less likely alternative.
- Corporate and agency yields will crash. Homeowners who can refi will be able to cut their payment. This will help balance sheets, but more importantly it will drive out remaining holders of corporate and agency debt. It may even close Gross’s safe spread, forcing him to seek other returns. Where will they go? I couldn’t say for sure but I have a hard time believing that there are no entrepreneurs left in the US who wouldn’t love a nice low business loan to get started. Here comes the capital.