By Charles Sizemore
That seemed to be the thrust of the 2014 Barron’s Roundtable. After a year that was brutal for all income-oriented investments, the panelists on Barron’s annual Roundtable — which include some real heavyweights such as Pimco’s Bill Gross, O.S.S. Capital’s Oscar Schafer, GAMCO Investors’ Mario Gabelli and Goldman Sachs’ Abby Joseph Cohen, among others — are broadly bullish on bonds.
Bill Gross, who over his career as a bond trader has established himself as one of the greatest investors in history, had this to say:
“At Pimco, we don’t expect yields to keep rising, even in the face of Fed tapering. When its asset purchases end, likely in late 2014, government bond yields will be dependent on the policy rate [i.e. Fed funds rate]. That brings us to Janet Yellen, who…is dovish with a capital D… Absent higher inflation and a policy rate change, the U.S. bond market, and other bond markets, will be stable.”
Gross also noted that U.S. Treasurys were a fine refuge for Japanese investors fleeing the falling yen.
Felix Zulauf, of Zulauf Asset Management, added a very good point:
“It doesn’t make sense that comparable French government bonds yield 50 basis points [i.e. half a percent] less than the 10-year Treasury. If the dollar holds up or strengthens slightly…it will create an arbitrage situation that puts downward pressure on U.S. yields.”
To decipher this “traderspeak,” an arbitrage opportunity is a riskless (or nearly riskless) trade in which a trader simultaneously buys and sells two similar assets that are mispriced relative to each other and makes money as the mispricing narrows. In this case, the trader would buy U.S. bonds (expecting yields to fall) and sell French bonds (expecting yields to rise).
I try to avoid hero worship, as watching the moves of other investors is no substitute for real research. But I agree with Gross and Zulauf here, and their comments are very similar to those of Jeffrey Gundlach, another highly respected bond manager. Tapering fears are vastly overdone. As the experience of Japan proved, a country emerging from a credit bubble and bust can have much lower long-term yields for much longer than anyone believed possible before the fact. More than two decades after Japan’s bust, the yield on 10-year Japanese bonds is a pitifully low 0.63%. In the absence of inflation — and with energy and commodity prices looking to stay low for the foreseeable future, I expect inflation to be a non-factor for the next several years — we won’t see higher bond yields.
Yes, tapering is happening. But think back for a moment to 2011, when Standard & Poor’s downgraded the credit rating of the United States. Rather than cause a mass dumping of Treasury securities, Treasury prices actuallyrose . It was riskier assets that got hit the hardest from the shock to investor sentiment.
Fed tapering is a very different animal than the S&P downgrade crisis, of course, but the result is largely the same. Tapering — which is perceived as taking away the punch bowl — has the effect of dampening the animal spirits of investors, and it has been emerging markets that have been hit the hardest of late.
But with emerging-market indexes in freefall and investor sentiment toward them as negative as I have seen in years, we’re very close to getting buying opportunities in some of my favorite emerging markets.
The iShares MSCI Turkey ETF (TUR) and the Global X FTSE Argentina 20 ETF (ARGT) are on my watchlist. They are beaten down with attractive valuations, but both are also at risk of further currency slides in the near-term. I don’t want to try to catch a falling knife here, so will wait for them to start a new uptrend before potentially buying.
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