Time to sell bonds?

February, 06 2013

13-02-04  PIMCO ‏@PIMCO

Gross (tweet 1 of 2): Don’t retreat – just be cautious. Central bank check writing creates bubbles/distortions in all markets. What to do??

the answer:

Gross (tweet 2 of 2): Sell long term bonds. Buy low P/E stocks, TIPS and Italy bonds.

That is scary. and as you will recall we have been warning end of last year of a highly possible spin in QE. Still the biggest risk in the markets is that they lose confidence that the Fed can control interest rates in the long end of the curve, and the critical 143-00 pivot was an area where this thesis could play out.  Last week was a frightening testament that when this market is ready to move there is little the Fed can do about it.  At this point either this level holds and bond prices continue to rally back to old highs or it gives and the QE trade unravels in their face.

Because of this widespread political dysfunction, we (in the West) are yet to evolve our credit-dependent growth model into something more durable, inclusive, fair and sustainable. Instead, yet another attempt is being made to get one more turn of growth from an exhausted, distortive and partial approach.

So, how should you reconcile these emotions? I would suggest the following for you to consider:

• Temper your optimism with caution: There is a limit to how far central banks, acting on their own, can divorce market pricing from fundamentals.
• Identify the major developments that are needed to validate existing market pricing: This speaks to not just economic, sector- and company-specific issues; it also involves technical factors, including the scale and scope of funds flowing to different market segments.

See our blog Time to sell bonds?