According to Bill Gross, manager of the $214 billion Pimco Total Return Fund, the bond market rally, that has been going on for 3 decades, may be drawing to a close.
Gross, on Bloomberg radio, said, ‘Bonds best days are behind us.’
What we all know if we own a bond and interest rates rise the bond principal decreases. It decreases only if we want to sell it. It does not decrease at maturity. The reason the bond principal decreases on an existing bond when interest rates go up is that the decrease reflects the current interest rate. A small decrease plus the current coupon will equal the current higher interest rate.
That is without a doubt confusing and I just wrote and read it back. Take my word, interest up current bond principal down. Write it on your medicine cabinet mirror so you’ll remember. And that is why Gross is kvetching the end of a three decade bond run. A run that saw bonds overtake stocks in the last decade as the best performing asset class.
Gross, who is a mighty fine poker player, just ask the folks at Treasury or at GMAC, who had to deal with him over the years, suggests that higher inflation will strike the U.S., U.K. and Japan. The reason is that governments will sell record amounts of debt to finance surging deficits.
He suggests that investors avoid U.K. debt and buy shorter term U.S. and Brazilian debt as well as longer maturity German and ‘core’ European bonds.
Putting his money where his mouth is Gross said Pimco filed to start a stock fund that can invest in bank loans, junk bonds distressed securities. The fund will buy securities and financial instruments economically tied to at least three countries and one of them ‘may’ be the U.S,
Gross’ final word to investors, ‘Don’t trust any government and verify before you invest.’
If you have any questions call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com. Share this blog with someone who has an interest.
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