BOND REPORT: Bill Gross, Others Look Past Treasurys For 2013

Date : 12/04/2012 @ 10:09AM
Source : Dow Jones News

BOND REPORT: Bill Gross, Others Look Past Treasurys For 2013

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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