Bill Gross stands corrected: Markets expected to muddle in unchartered territories in 2012
Last year Bill Gross spelt out his bearish outlook on US treasuries for various reasons and he was under-invested treasuries because they offer no upside.
US 10-year Treasury yield (inverse to Treasury prices) closed below 2% to 1.87% for the first time in history. The 10 yr note prices are up nearly 17%.
(Ironically, in the days after S&P downgraded U.S. creditworthiness, investors flocked to U.S. Treasury bonds, and any further downgrades will continue to result in investors seeking the security of U.S. Treasury bonds. The European sovereign debt crisis, the elephant in the room, although nearly not as bad as the nadir a few months ago, is still a significant problem.)
Bill Gross’s latest (Jan 2012) monthly investment outlook indicates his bullish view on U.S treasury bonds as against his bearish views on US treasuries a year back. PIMCO fund’s underperformance (as compared to peer group) is a reflection of it’s under invested positions in US treasuries.
Durations and average maturities should be at their maximum possible limits” states the letter. So now treasuries have value? With the 10-year note yielding under 2%, and the 5-year below 90bp? Of course the answer PIMCO offers is that longer durations should be in TIPS to protect against inflation. But TIPS yield is now negative, so with a 2% inflation rate, one is roughly at the same yield as with the 10-year note.
Conclusions/learning:
1. Globally markets and economies are treading unchartered waters amidst black swan events like the subprime crisis, sovereign credit crisis & Euro zone crisis.
2. Markets continue to surprise the even the best regarded market analyst/strategist.
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