Talking Numbers

Why Bill Gross will lose the bond war

Talking Numbers

Pimco's Bill Gross likens the bond markets to the Battle of the Somme. But, is he losing it?

Since May, Pimco has seen its clients take out $18.7 billion from its Total Return fund, according to Morningstar. Most of that – a record $14.5 billion – was redeemed in the month of June alone.

However, Pimco’s co-founder Bill Gross says investors shouldn’t bail out just yet. He has full confidence that his company he will win the Bond Wars.

Bond Wars? What’s that?

That’s the way Gross refers to the past couple of months in bonds. In a note posted today on Pimco’s website, Gross likens the bond market’s recent sell-off to the horrific World War I Battle of the Somme which left over a million people dead or wounded. Pimco’s bond-based Total Return ETF is down nearly 5% since the start of May.

As noted by Gross, the British were using old weapons and tactics while the Germans’ used the relatively new-tech of machine guns when they fought by the Somme in 1916.

(Read: Are you not entertained? Pimco vows 'bond war' win)

The parallel is obvious to Gross, who says, “All investments, bonds included, have a number of modern-day weapons at their disposal which can be used to defend against higher interest rates, weapons that don’t necessarily go down in price as yields rise. These weapons can collectively be categorized as ‘carry.’”

Gross says dealing with maturity risk in bonds is an old-fashioned way of looking at bonds while dealing with credit, volatility, the yield curve, and currency exposure is more appropriate for these times.

(Read: Treasury Department auctions $16 billion in 30-year bonds at high yield of 3.652%)

So, is Gross right that in a low-to-zero interest rate environment, bond investors need to focus less on maturity extension and more on credit spreads, yield curve differences, volatility, and currency risks? How can that outlook be applied to the US 10-Year?

We talk numbers on the US 10-Year bond with Steve Cortes, founder of Veracruz TJM, on the fundamentals. Looking at the charts is JC O’Hara, Chief Market Technician at FBN Securities.

To hear Cortes and O’Hara analyze the 10-Year, watch the video above.

-----

Coming up later:

  • Roubini economist: Three reasons gold is going to $1,000
  • Why you can’t bet against Tesla

Follow us on Twitter: @CNBCNumbers
Like us on Facebook: facebook.com/CNBCNumbers

Recommended for You