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Bill Gross is out with his monthly bond outlook, in which he likens losing money on bonds to dying at the Somme.
Gross is fond of military tactics, one suspects his copy of Sun Tzu’s ‘The Art of War’ is particularly well thumbed. You don’t survive over 40 years in the investment business without knowing how to fight a battle after all.
But what is he actually saying? Buying bonds right now is going to get you killed, probably not. If that were his missive he may as well hang up his helmet and wave the white flag of defeat. No, now is the time to man the trenches and prepare for battle.
Because, as any soldier will tell you, proper preparation prevents poor performance. So how do you prepare your portfolio in order to face the coming battle of higher interest rates.
Gross says the changing nature of the bond market will require searching for yield, or “carry”, in new places and that investors should lessen their exposure to longer-maturing bonds, which are sensitive to rising rates.
At the same time, investors should enhance their exposure to credit, volatility, curve, and currency carry. In what Gross referred to as “the most important conceptual change I have ever written about,” he said that a new bond-market environment will require investors to adapt their portfolios to new risks.
Gross ends his piece by saying.
“Stick with PIMCO, we’re going to win this new war!”
I will end mine with the words of Greek Philosopher, Heraclitus.
“Out of every one hundred men, ten shouldn’t even be there, eighty are just targets, nine are the real fighters, and we are lucky to have them, for they make the battle. Ah, but the one, one is a warrior, and he will bring the others back.”
Is Bill Gross a warrior? I’ll leave that for you to decide.
Todays Other Top Stories
MoneyBeat: – For bond investors, a ‘generational’ chance to sell. – The bond market’s dominance is coming to an end, and the current moment presents a once-in-a-generation selling opportunity, a well-known portfolio manager is saying.
Charts etc: – Bonds reflecting economic news. – The better the economic news, the more likely the Fed begins to taper sooner rather than later. It’s assumed less QE will translate into higher interest rates, a belief that’s putting pressure on bonds. However, another potential reason for bond weakness in the face of encouraging economic news is bondholders sell in favor of re-allocating funds to riskier assets, such as equities. Many are asking the simple question: if the economy is improving, it should benefit companies/stocks so why continue to hold bonds?
Bloomberg: – Bond share tumbles as Morgan Stanley says sell. – Institutional investors’ allocations to dollar-denominated bonds have dropped to the lowest level since 2007 as strategists at Morgan Stanley and JPMorgan Chase & Co. see a shift away from the debt that may fuel higher borrowing costs.
MoneyBeat: – Why you shouldn’t throw sewer bonds out with the bathwater. – Municipal bonds that are paid by revenues from sewer systems have gotten some bad press in recent years. But ask any muni-bond manager, and they will tell you that sewer bonds normally rank among the safest types of muni bonds.
WSJ: – Banks struggle with proprietary bond-trading networks. – Some large banks’ efforts to grow proprietary bond-trading networks have stalled a year after they were launched, according to people briefed on the matter.
Barron’s: – Munis yield as much as corporate bonds — Bargains for taxpayers. – Bond rout hits munis harder, pushing yields above taxable bonds. Is Larry Ellison a better bet than Jerry Brown for 30 years?
The Fiscal Times: – 6 muni bond myths still rocking the market. – BlackRock’s muni bond investment and research team has just published a handy guide to life in the aftermath of the Detroit bankruptcy, highlighting six myths that still govern the market.
Crossing Wall Street: – What if the stock market were a bond? – Here’s an update to one of my more off-the-wall ideas. I was curious to see what the historical performance of the stock market looks like, but in the form of a bond.
Nasdaq: – Are you selling your bonds? – Real time insight. – With treasury rates spiking in May and staying elevated, investors have finally gotten their brokerage statements and have seen the impact of rising rates on their bond mutual and ETF funds.
Investors Chronicle: – Stick with strategic as investors flee bonds. – Do not ditch bonds altogether but rather get your exposure via strategic bond funds, which can invest across different types of fixed income and shorten their average duration, a way of minimising volatility.
WSJ: – Detroit rattles muni market. – A fight over bankrupt Detroit’s sewer system threatens to reshape the nation’s $3.7 trillion municipal-bond market.
NorthJersey.com: – Don’t lose faith in municipal bonds because of Detroit. – Is the Detroit bankruptcy a sign of bigger problems to come for the municipal bond market?
Financial News: – High-yield and Yankee issuance booms. – Revenues generated by investment banks working on the issuance of high-yield bonds have passed the $5 billion mark in the year to date, according to data provider Dealogic, higher than in the same period of any other year on record.
Bloomberg: – Biggest Michigan county suffering Detroit contagion. – Wayne County, home of Detroit, has seen the extra yield investors demand to own its debt soar to a record, showing the price Michigan localities are paying after the Motor City filed for bankruptcy.
InvestmentWeek: – Where to find value in bonds after the ‘taper tantrum’. – It would be an understatement to say it has been an interesting and, in many ways, frustrating recent period for bond managers.
Surprisingly solid UST price action before long bond auction.
— Ed Bradford (@Fullcarry) August 8, 2013
muni dichotomy at play as parts of the market weaken daily yet the availability of bonds to buy is shrinking due to excess demand up short
— Michael Pietronico (@MillerTabak) August 8, 2013