The head of the world’s largest bond fund, PIMCO’s Bill Gross remains extremely bearish on U.S. bonds.
His latest investment letter identifies four scenarios in which bondholders would get burned. Basically these are sovereign default, currency devaluation, inflation, and poor returns relative to other asset classes.
In other words, you can’t win. Gross compares Ben Bernanke to the devil and calls ZIRP a devil’s haircut: “This is not God’s work – it has the unmistakable odor of Mammon.”
Gross recommends putting money in foreign bonds and other assets that yield more than Treasuries.
Devils may or may not be present in this earthly world, depending on your point of view, but if they are, there’s a good chance that exorcists do too and PIMCO’s got just the antidote. Instead of accepting historical durational risk and the prospect of a barbershop quartet of possible haircuts, bondholders should recognise that yield or “spread” comes in different varieties. Maturity extension is just one of them, yet if yields are too low based on historical example, an investor should analyse other yields or other “spreads” which are not. That is what we call “safe spread” – the recognition that credit spreads, or emerging market returns, or currencies with positive and high real interest rates are more attractive than those old-fashioned gilts and Treasury bonds offering 2–3%. Those are markets that need to be “exorcised” from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint. It is still possible to produce 4–5% returns from a conservatively positioned bond portfolio – you just have to do it with a different mix of global assets.