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Bill Gross, manager of the world’s largest bond fund, The PIMCO Total Return Fund, said Thursday that the firm believes the ‘new neutral’ real policy rate will be close to 0 percent as opposed to 2-3 percent in prior decades.
“If ‘The New Neutral’ rates stay low, it supports current prices of financial assets,” Gross said in his latest investment outlook. “They would appear to be less bubbly.”
Gross introduced the world to his ‘New Neutral’ mantra back in May, to describe a period when the global economy is transforming from one of recovery following the financial crisis — termed the ‘New Normal’ back in 2009 — toward stability that is characterized by modest economic growth over the next three-to-five years.
“Commonsensically it seems to me that the more finance-based and highly levered an economy is the lower and lower real yield levels must be in order to prevent a Lehman-like earthquake,” Gross told investors in his monthly letter to clients.
“If the price of money is the basis for an economy’s prosperity – and it is increasingly so in developed global economies – then central banks must lower the cost of money to maintain that prosperity – and keep it low.”
With global economies expanding at a slower pace than they did prior to the financial crisis, central banks around the world are likely to keep their key interest rates low, cushioning lending rates from a sharp rise.
Thursday, the European Central Bank cut interest rates to record lows, imposing negative rates on its overnight depositors to cajole banks into lending more and to fight off the risk of deflation. In the United States, the fed funds rate is currently anchored near zero, with many traders and economists expecting it to begin rising in the middle of next year.
But Gross suggested yields will be dictated by how high the Fed eventually hikes rates and that the ‘New Neutral’ suggests that “the real policy rates will be frigidly low for an extended period of time.” Consequently, yields across the credit markets may stop at a lower point than in past rate cycles.
Todays Other Top Stories
BlackRock: – Municipal Market Update. – May was another positive month for the municipal market, and the second best May in a decade, resulting in a year-to-date (Ytd) return of 6.18%. The upward bent in performance has been driven almost entirely by technicals, as investors seem to be less focused on fundamental factors. We continue to emphasize careful security selection and nimble sector rotation, with the ultimate goal of preserving the Ytd gains.
Bloomberg: – SEC’s Gaunt sees fines for muni bond breaches: Five Questions. – The head of the U.S. Securities and Exchange Commission’s unit overseeing municipal bonds and pensions is urging local governments to come clean if they failed to keep investors informed about the state of their finances.
Zacks: – Profit From This Top Ranked Municipal Bond ETF: MLN. – Given the bright prospects of the muni space, a look at one of the top ranked ETFs in the space could be a good way to target the best of the segment.
Reuters: – U.S. municipal bond market continued to shrink in Q1. – The amount of outstanding U.S. municipal bonds continued shrinking in the first quarter to $3.661 trillion from $3.671 trillion in the final quarter of 2013, Federal Reserve data released on Thursday showed.
Reuters: – Pair of U.S. senators urges disclosure on bond markups. – Municipal and corporate bond dealers would have to tell investors how much they charge to cover their compensation under bipartisan legislation currently in the U.S. Senate to end secret price markups.
LearnBonds: – Why are European bond rates at historic lows? – It has been a long time since European Bond Rates have been so low. In fact, in some cases one has to go back beyond the Napoleonic Wars in the early nineteenth century to find longer-term interest rates so low. Question is, why?
Businessweek: – Stop changing my opaque bond market before profits vanish. – This thing called transparency is spreading in the corporate-bond market, and it’s hurting traders’ bottom lines.
Investors.com: – Why bonds are up and rates down despite Fed tapering. – Bond prices and interest rates have astonished investors this year by doing the very opposite of what many expected as the Federal Reserve scales back its monthly bond purchases, known as quantitative easing.
The Starphoenix: – Bond rally continues despite PIMCO’s woes. – Bill Gross and Pimco suffered another tough month of redemptions in May, but the so-called bond king’s ongoing woes are the exception for an asset class that continues to defy expectations this year.
TheStreet: – U.S. Bonds: A safe haven in an uncertain world. – Bond yields continue to be very low even with U.S. Fed reserve tapering (selling bonds) underway. US bond yields are lower for 10- and 30-year bonds. This decreasing yield phenomenon is likely due, in part, to international turmoil in the Ukraine, Thailand and elsewhere. The U.S. bond market has less default risk than other sovereign bond markets.
MV Pro: – Treasuries: Real yields flash a warning sign. – This post is two-faceted as I will be looking at two different recent developments. The first highlights the causa proxima behind the most recent sell-off in Treasuries. The second is broader — I take a look at recent highly correlated changes in different asset classes that smell very funny when considered together.
Investopedia: – Why this investment will remain a boomer’s best friend. – The retirement of tens of millions of Baby Boomers over the next few decades has led to much speculation. Much of it even may come to pass in what should amount to a clear example of the maxim “demography is destiny.” Some recent research contends that such a massive move out of the work force will help and hurt various industries and investments. One investment that should benefit, however, are Treasury bonds.
Investment Grade Bonds
Eric De Groot’s Insights: – Long term charts corporate bonds spreads updated. – Concentration of capital within the corporate bond market serve as proxy for risk appetite and liquidity. Extreme narrow of spreads, readings below -1.96, suggests complacency and liquidity. Since money flows from one extreme to another, complacency and liquidity are usually followed by panic (fear) and illiquidity.
High Yield Bonds
ETF Trends: – Fed speak reignites love for big junk bond ETF. – Buoyed by expectations that higher interest rates are not an imminent scenario, investors are returning to some of the largest high-yield bond ETFs even as yields drop.
Investing.com: – JNK: Higher highs rolling over into lower lows. – I’ve got a full package to show you. Complete with surges higher followed by pullbacks, placed among rounded bottoms. Are you intrigued? Then take a look.
Businessweek: – Enigma of junk explained in pension fund’s return hurdle. – To understand why investors are willingly accepting the lowest yields ever on the riskiest corporate securities, look to Japan.
Bloomberg: – Emerging-market local debt cheapest since 2008. – As bond investors have returned to emerging markets in recent months, they’ve focused their buying on foreign debt and balked at purchasing local notes. That’s about to change, according to Standard Life Investments, the money-management arm of Scotland’s biggest insurer.
Businessweek: – Don’t fight money train say emerging-market bond buyers. – Investors are so convinced that 2014 will continue to be the opposite of 2013 that they’re piling back into emerging-markets wagers that were among last year’s biggest losers.
Citywire.co.uk: – How would eurozone QE affect global bonds? – Pimco is tipping emerging market sovereigns as a potential beneficiary of any European Central Bank-led quantitative easing (QE), as markets eagerly await the ECB meeting later today.
Amit H. Shah: – Don’t let rising inflation become the bane of your portfolio. – Inflation is expected to increase in the near future, and as a consequence, interest rates will increase. Investing in an ETF that shorts the performance of long-term treasury bonds will also be profitable in a fiscal environment of increasing interest rates.
William Baldwin: – Best ETFs: Short-term bond funds. – You’re likely to be particularly conscious of costs in a short-term bond fund, since the yields are so tiny that you’re at risk of getting a negative return.
Digital Journal: – Tradeweb launches active U.S. Treasuries on dealerweb. – Tradeweb Markets, the leading global provider of fixed income and derivatives marketplaces, announced the launch of active U.S. Treasury bond trading on its electronic Dealerweb platform. The new order book technology supports trading of the most liquid, on-the-run U.S. Treasury bonds, with participation from all leading dealers and several electronic market making firms.
Gross: New Neutral policy rate is critical for asset pricing. PIMCO believes it’s 0% real, 2% nominal for 2017 & beyond. See today’s new IO.
— PIMCO (@PIMCO) June 5, 2014
Kiesel, Dep CIO: Flying in more middle seats now? We continue to favor US airlines bc solid demand, improving profit & capacity discipline.
— PIMCO (@PIMCO) June 5, 2014
here is the main takeaway from the ECB today : they are making it more painful to hold cash – buy dips in Treasuries and munis…
— Michael Pietronico (@MillerTabak) June 5, 2014