By Deborah Levine, MarketWatch
SAN FRANCISCO (MarketWatch) ? Bond investors such as Pimco's
Bill Gross and strategists, including those at RBS Securities and
Credit Suisse, are looking for where to put their money in
2013.
Among fixed-income options, Gross, manager of the world?s
biggest bond fund, said his picks are mostly outside the
traditional options of Treasury bonds as well as U.S. corporate
debt ? investment grade or high yield.
?If a 2% or lower real growth forecast holds for most of the
developed world over the foreseeable future, then it is clear that
there will be investment consequences,? Gross wrote in a commentary
Tuesday.
He?d rather buy high-quality municipal bonds or U.S.
inflation-protected bonds. He also still favors commodities like
oil and gold and emerging-market stocks in currencies besides the
dollar (which usually indicates investors are expected to benefit
from some currency appreciation too).
As for his ?pans,? Gross said he?s less favorable to long-term
bonds in developed countries, including the U.S., U.K. and Germany,
as well as high-yield bonds and bank and insurance-company
stocks.
?The list to a considerable extent reflects the view that
emerging economy growth will continue to be higher than that of
developed countries. Their debt on average will remain much lower,
and their demographic age much younger,? he said.
The response from developed-market policy makers will be to
attempt to reflate their economies ? or expand output through
stimulus measures ? which will move yields gradually higher, he
said. The inevitable policy response of developed economies to
slower growth will be to reflate in order to minimize the impact of
the aforementioned structural headwinds.
?Investors should expect future annualized bond returns of 3% to
4% at best and equity returns only a few percentage points higher,?
Gross said.
Moving to Australia
Tuesday?s global news also fits into this theme, as the Reserve
Bank of Australia cut its benchmark interest rates to a record low.
The country?s bonds had long been held up as one of the better
places for bond managers, which central-bank managers had also
caught onto: a stable, developed, growing economy supported by
commodity resources, which used to carry yields close to 7%. Now,
10-year Australian bonds yields 3.18%.
In the eyes of RBS Securities bond strategist Bill O?Donnell,
RBA Governor Glenn Stevens? comments were ?a thinly veiled way of
observing that Australia was falling a bit behind in the ongoing
global currency war as an increasing number of central banks in
larger exporting nations feel the heat/need to stay competitive in
foreign-exchange rates.?
If true, then ?as global central banks cut rates to stay
competitive in the export markets,? the longer-term threat of
inflation should increase, he said. That?s something bond investors
need to be wary of.
Australian yields are still about double what U.S. Treasury
bonds yielded on Tuesday. Yields on 10-year notes (10_YEAR)?, which
move inversely to prices, slipped 1 basis point to 1.62%, after
rising to 1.64% earlier. A basis point is one one-hundredth of a
percentage point.
Yields on 30-year bonds (30_YEAR)?turned down 1 basis point to
2.81%, staying well within the range of recent weeks as investors
remain nervous about the lack of progress in Washington towards
resolving the so-called fiscal cliff. The package of tax breaks and
spending measures expiring at the end of the year threatens to push
the economy back into recession.
Five-year yields (5_YEAR)?declined 1 basis point to 0.62%.
Excluding inflation in any given country, ?extraordinarily low
real yields dominate the asset price structure as 2013 begins,?
analysts at Credit Suisse predicted. They expect the global economy
to improve, ?but not boom? in 2013, with global demand remaining
uncertain.
Like Gross, they also pointed to continuing demographic trends
in the U.S, and what they will mean for investing and spending. The
two big factors in many developed countries are rising household
formation and baby-boomer retirements.
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