This week marks the 2-year anniversary of the 2009 stock market bottom, but there's little celebrating among retail investors. General speaking, individual investors fled from the stock market in 2008 and 2009 for the perceived safety of the bond market, a trend which didn't abate until late 2010.
But with yields rising and concerns mounting about budget deficits at all levels of government, the question begs: Are bonds still safe?
If by "bonds" you mean U.S. Treasuries, the answer is a resounding "no", according to Bill Gross, founder and co-CIO of PIMCO, which has about $1.2 trillion of assets under management.
"The Treasury market typifies perhaps the most overvalued area of the bond market," Gross says.
In the accompanying video, Gross discusses the theme of his most recent monthly strategy piece: "Who will buy Treasuries when the Fed doesn't?"
Specifically, Gross worries about the end of the Fed's QE2 program, slated for June 30. "If someone has been buying $1.5 trillion worth of Treasuries and now doesn't buy $1.5 trillion worth of Treasuries, it'll affect yields on the upside."
'D-Day' for Debt
In his recent writings, Gross says June 30 could be "D-Day" for the Treasury market - "a day fraught with hope for victory, but fueled with immediate uncertainty and fear as to what would happen in the short term."
Noting the Fed has bought roughly 70% of Treasuries since QE2 was launched, the so-called Bond King is approaching the end of the program with a sense of foreboding. "Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets," he writes.
Citing the Federal Reserve's own analysis, Gross says QE2 has lowered Treasury yields by at least 0.5% on debts maturing in 5-, 10- and 30-years. Whether rates will rise by that much (or more) when QE2 ends remains to be seen; but Gross doesn't recommend sticking around to find out.
"It becomes a question of musical chairs to a certain extent: who gets out first and who's the last one looking for a chair on June 30," he says.
That said, Gross sees opportunities in other areas of the fixed-income market, which provide what PIMCO calls "safe spread," including: emerging market corporate and sovereigns with higher initial real interest rates and wider credit spreads; floating as opposed to fixed interest rates; and "importantly" denominated in currencies other than the dollar.
- Bill Gross