When Bill Gross talks about bonds, people listen. The founder of PIMCO and manager of the world’s largest bond fund recently took up four questions about bonds that have been coming in from investors. Discussing figures from Paul Volcker to Ben Bernanke, Gross held forth on where we’re headed with respect to quantitative easing and how investors should prepare.
1. What is going with bond markets now?
In response to this question, Gross offers the example of Fed activity in 1980 to inform the present. Then, Paul Volcker shrank quantitative easing in response to wild inflation. The result was excellent for bond investors. Today, the situation is quite the opposite, though Fed Chairman Bernanke has suggested an exit from QE is ahead. While Gross believes this move won’t create a bull market for bonds, he reminds investors it likely won’t create a bear market, either. After all, the exit from QE policy will be very gradual.
2. When exactly will the Fed end QE and should investors worry about rising rates?
The Fed continues to say a 6.5 percent unemployment rate is the tipping point in terms of U.S. economic policy. If and when that goal is met, it still doesn’t mean the Fed will abruptly end QE, according to Gross. Like the IMF, Gross doesn’t see QE ending (or even slowing much) for the rest of 2013, so rates are likely to remain unchanged, other than the normal fluctuations. He notes the managers of bond funds will have to adjust if the rates move too much.