{"id":13614,"date":"2011-06-02T14:32:14","date_gmt":"2011-06-02T18:32:14","guid":{"rendered":"http:\/\/www.thedisciplinedinvestor.com\/blog\/?p=13614"},"modified":"2016-09-20T08:51:37","modified_gmt":"2016-09-20T12:51:37","slug":"when-bill-gross-speaks-frogs-panic","status":"publish","type":"post","link":"https:\/\/thedisciplinedinvestor.com\/blog\/2011\/06\/02\/when-bill-gross-speaks-frogs-panic\/","title":{"rendered":"When Bill Gross Speaks –> Frogs Panic"},"content":{"rendered":"

Recently, Bill Gross, Pimco’s bond market king, discussed why he is bearish on U.S. Treasuries. He also reported that he has recommended \u00a0 selling most, if not all, U.S. long-term Treasuries and actually went short. You gotta love this guy….\"\"<\/p>\n

We have been waiting for the markets to wake up and realize that this is close to the lowest interest levels we will see for some time to come. Perhaps it should be described as a “Generational low”<\/strong> for bonds. Either way, the idea that investors will be willing to get paid next to nothing for their bonds is ludicrous.<\/p>\n

Add to that the recent announcement that Moody’s could place U.S. Govt rating on review for downgrade if progress isn’t made on increasing the debt limit. That was enough to spark sellers into action and drive the long-bond down..all of the progress it made yesterday. (Horowitz & Company clients<\/a> own an inverse long-bond ETF, effectively shorting the long treasury bond)<\/p>\n

From Bloomberg:<\/p>\n

Pacific Investment Management Co.\u2018s Bill Gross said investors in U.S. Treasuries are being lulled into a false sense of security by positive returns this year because yields aren\u2018t high enough relative to inflation.<\/p>\n

Gross, who oversees the world\u2018s biggest bond fund, said bond investors face a similar fate as a frog that remains in a pot of water while the temperature is gradually increased until the amphibian is cooked. <\/strong><\/em>Inflation erodes the value of the fixed payments of bonds over time.<\/p>\n

\u201cMuch of the Treasury yield curve now rests in negative territory when compared with expected future inflation, and that should send our bond investors into a hopping funk,\u201d\u009d Gross wrote in his monthly investment commentary today on Newport Beach, California-based Pimco\u2018s website. \u201cPrices are already nearing the boiling point.\u201d\u009d<\/p>\n

Treasuries have returned 2.6 percent this year as Gross reduced government and related debt in his $243 billion Total Return Fund to minus 4 percent of assets as of April 30. Gross said governments such as the U.S. are intentionally keeping interest rates lower than they should be to help reduce record debt levels. The fund has returned 0.56 percent in the past month, lagging behind the performance of 77 percent of its competitors, according to data compiled by Bloomberg.<\/p>\n

\u201cBond yields at least have a mathematical zero bound below which they cannot journey for more than a few nanoseconds,\u201d\u009d Gross wrote. \u201cMonetary policy in developed countries has been lowering the temperature and absolute level of yields for the past 2 1\/2 years post Lehman Brothers.\u201d\u009d
\nReal Yield<\/p>\n

The Federal Reserve has kept its target rate at a record low range of zero to 0.25 percent since December 2008 to help stimulate growth after the worst recession since the Great Depression.<\/p>\n

Yields on 10-year notes fell below 3 percent today for the first time since December after ADP Employer Services reported that U.S. companies added fewer jobs in May than economists forecast. With the consumer price index rising 3.2 percent on an annual basis in April, the benchmark note offers investors a so- called real yield of negative 0.20 percentage point.<\/p>\n

Gross recommends that investors buy \u201ccheap bonds\u201d\u009d and focus on \u201csafe spread,\u201d\u009d or buying more floating and fewer fixed-rate notes. Investors should also add credit components that may include investment grade, high yield, non-agency mortgage, or emerging market related sectors, and increase the non-dollar emerging market currencies portion of their portfolios, he wrote.
\nTotal Return Fund<\/p>\n

The Total Return Fund has returned 8.13 percent in the past year, beating 78 percent of its peers, according to data compiled by Bloomberg. Gross, the founder and co-chief investment officer at Pimco, has averaged returns of 8.93 percent on average over the past five years, topping 98 percent of his competition.<\/p>\n

The fund can have a negative position by using derivatives or futures or by shorting. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen.<\/p>\n

The firm\u2018s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the company\u2018s website. Pimco, a unit of the Munich- based insurer Allianz SE, managed $1.28 trillion of assets as of March 31.<\/p><\/blockquote>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Recently, Bill Gross, Pimco’s bond market king, discussed why he is bearish on U.S. Treasuries. He also reported that he has recommended \u00a0 selling most, if not all, U.S. long-term Treasuries and actually went short. You gotta love this guy…. We have been waiting for the markets to wake up and realize that this is […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[12],"tags":[481,293,483],"class_list":["post-13614","post","type-post","status-publish","format-standard","hentry","category-markets","tag-economy","tag-fixed-income","tag-markets","et-doesnt-have-format-content","et_post_format-et-post-format-standard"],"acf":[],"_links":{"self":[{"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/posts\/13614","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/comments?post=13614"}],"version-history":[{"count":0,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/posts\/13614\/revisions"}],"wp:attachment":[{"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/media?parent=13614"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/categories?post=13614"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thedisciplinedinvestor.com\/blog\/wp-json\/wp\/v2\/tags?post=13614"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}