PIMCO's Gross: Is Bull Market in Bonds Over?

Bill Gross, PIMCO’s founder, managing director and co-CIO, says – when it comes to bonds – the times are indeed changing, now that the Federal Reserve has announced a second round of long-term Treasury bond purchases to the tune of $600 billion, referred to as QE2.

“The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment,” he wrote in a November commentary released at the end of last month.                          

“Bondholders, while immediate beneficiaries will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities …,” Gross added.

The Fed’s bond buying “raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near  zero percent returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion,” he explained.

On a positive note, however, he says there are other ways to invest, which he calls “safe spreads:” developing/emerging market debt with higher yields and non-dollar denominations, along with high- quality global corporate bonds. “Even U.S. Agency mortgages yielding 200 basis points more than those 1-percent Treasuries, qualify as ‘safe spreads,’ ” Gross explained.