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Bill Gross has given investors a detailed take on what to expect if his “new neutral” outlook plays out in the coming years. The short answer: Don’t get your hopes up.
Gross’s new neutral dictates that with global growth slow and economies holding a lot of leverage, central banks can be expected to keep their lending rates lower than they have in the past. The assertion has been gaining traction since its release, and futures contracts currently price in a slower rise in interest rates than the consensus projections of Fed officials.
But what does it mean for your money? Gross tackles that question in his latest monthly investor outlook.
“Asset price growth therefore – capital gains in market speak – will be harder to come by. Without the tailwind of declining interest rates which have increased profit margins as well as decreased cap rates, they will instead face structural headwinds… PIMCO is not saying that asset prices will go down – they just won’t go up as much as many expect.”
In a world without huge rallies and without huge crashes, what should you buy? He starts with this cautious note: “First of all, reduce expectations. Second of all, do not reach for assets outside of your risk universe.”
“As to specific strategies, we believe high quality Treasury and corporate bonds are fairly priced, but not cheap. Our typical durations are at index levels. We believe the yield curve will gradually flatten, but not in historical cyclical proportions. We believe credit spreads are tight, but may stay there. We still believe the Fed will be on hold until mid-2015 and will hike only gradually to our New Neutral 2% by 2017. We think investors should own bonds, and an average proportion of stocks too.”
You can read Gross’s full investment outlook, along with a recent discussion he had with a Vietnamese cab driver here.
Todays Other Top Stories
LearnBonds: – 4% ten-year Treasury by Turkey day? – Will rates really get as high as 4% by the time Thanksgiving comes around. Adam Aloisi takes a closer look at the possibilities and gives advice on how to structure your portfolio in any event.
Bernardi Securities: – 2014 mid-year municipal market update. – A look back at the municipal bond markets first half performance and looking forward into the second half of the year.
Daily Record: – Money Management: Not all municipal bonds are created equal. – The municipal bond market is complex. It is vastly different than any other market in terms of its size and fragmentation. There are over one million individual bonds across 55,000 different issuers that comprise this $3.7 trillion market (Source: Municipal Securities Rulemaking Board). While some of these bonds share some common characteristics, they are largely different in terms of their source and stability of revenue (risk).
MMA: – Municipal market update. – As of Friday last week, interest rates paid by municipaliƟes were at their lowest in 12‐months as many bond markets improved. Municipals have performed better than most fixed‐income sectors buoyed by the lack of issuance.
Reuters: – UBS facing over $600 mln in claims over Puerto Rico funds. – UBS AG is facing claims of more than $600 million from clients who say the bank is responsible for losses they incurred on investments in risky Puerto Rico debt, UBS said in its quarterly report on Tuesday.
Bloomberg: – Philadelphia’s please touch museum says hands off. – Philadelphia’s Please Touch Museum, which says it was the first designed to serve children 7 and younger, encourages guests to bang on painted toads and pull on ropes. It doesn’t want bondholders to grab the items away.
Fox Business: – How a crisis can benefit your portfolio. – Pity the municipal bond investor. One day he is basking in self satisfaction because his shrewd investments in public works projects not only help keep cities running but also boost his income by keeping most of his earnings away from the tax men. The next, someone’s yelling at him to get out of the water.
Citywire: – Pace of U.S. rates rise will surprise markets, says GSAM manager. – U.S. interest rates will rise as expected early next year but at a quicker pace than markets expect, according to Goldman Sachs AM’s Iain Lindsay.
About.com: – Could an investor exodus from bond funds cause a market crash? – For several years now, pundits have found countless reasons to predict the bond market’s demise, and now there’s a new one: bond funds are just too popular. That’s right: the fact that so much money has flowed into bond funds could ultimately lead to an unexpectedly severe market downturn.
FA Mag: – Agency bonds a higher-yielding Treasury alternative. – For an investor seeking a conservative product with a touch more risk than a government-backed bond, an agency bond is an option that offers a higher yield.
ETF Trends: – Treasury bond ETFs don’t look frothy. – Treasury bonds exchange traded funds have strengthened this year, opposing calls for rising rates at the start of the year, and there may not be enough irrational behavior to justify a swift correction.
FT: – Top-rated government bonds defy gravity. – When you hit rock bottom, the only way is up. One day that might apply to yields on the world’s safest and most liquid government bonds – US Treasuries, UK gilts, German Bunds and Japanese government bonds. One day – but maybe not yet.
Investment Grade Bonds
Business Insider: – Corporate America is borrowing like crazy. – In Business Insider’s latest Most Important Charts In The World feature, Gerard Minack of Minack Advisors alerted us to the following chart, which shows how much corporate debt has ballooned since the financial crisis.
Donald van Deventer: – AIG Bonds: A reward to risk ratio twice as high as the median bond issue. – American International Group Inc. has made a dramatic recovery from the credit crisis and now sports default probabilities at 10 years, which are lower than IBM’s.
High Yield Bonds
BlackRock: – Investor fatigue setting in? – Despite a generally positive tone to earnings season, investors may be finally showing signs of fatigue, as seen by aggressive selling of risky assets, namely high yield and U.S. equities. Russ K explains the implications.
Investment News: – Dan Fuss: Risk in geopolitics, high-yield, leveraged funds. – Loomis Sayles bond fund manager says the firm is “as cautious as we’ve ever been”.
Yahoo Finance: – Junk bonds turning cash into trash. – Investors are unloading their junk bonds. Why there’s not enough reward these days for the risk.
Zero Hedge: – The world’s most crowded trade. – With over $900 billion invested into bond funds by mom-and-pop investors since the global financial crisis, the great law of unintended consequence is gearing up to rear its ugly head. Once again, money will be taken from those least able to afford it.
Market Realist: – Must-know: High yield bonds are risky and costly. – Riskier bonds can limit diversification and look expensive too. Meanwhile in the bond market, investors have traded interest rate risk for credit risk during the past few years (and they’ve been amply rewarded for doing so).
InvestorPlace: – 3 best mutual funds for junk bonds. – Is now a good time to invest in junk bonds? If so, who has the best junk? Will we find it in corporations, municipalities or overseas?
Citywire: – U.S. bonds biggest threat to emerging markets, says JPM. – Richard Titherington, manager of JPMorgan Emerging Markets Income, says another bout of turbulence in US bonds is ‘biggest single risk’ for his fund.
ETF Channel: – 25 dividend giants widely held by ETFs. – These 25 stocks all yield over 5 per cent and are available via most ETFs.
MPI: – The case for careful analysis of nontraditional bond funds. – Despite their popularity, some feel that nontraditional bond funds are simply trading rate risk for credit risk in the form of high yield and emerging markets debt. With tighter correlations between low quality credit and equities, such credit risk doesn’t quite match the conservative stance many investors seek in their fixed income allocations.
Gross: Prior Fed minutes showed “several” participants consider geopolitical situation. Expect that number to increase.
— PIMCO (@PIMCO) July 30, 2014
— Bob Brinker (@BobBrinker) July 30, 2014
Soft $29 bln U.S. 7-year note auction sends UST yields to session highs, 10-year yield at 2.560%, 30-year 3.309%.
— Richard Leong (@RichardLeong2) July 30, 2014