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.
3. How does the Total Return fund aim to succeed in the current market?
On the topic of his fund’s strategy, Gross tells investors he’s not out for big returns at the moment. Instead. Total Return aims to pass through the current volatile phase by minimizing risks (exiting struggling companies) and pushing investments in attractive buys (including intermediate Treasuries). He’s also sticking with countries whose balance sheets he considers “higher quality,” including the U.S., Brazil, Mexico, and Australia.
4. What’s the smart move for investors as financial gains in the bond market remain a challenge?
On this topic, Gross reminds investors that being in the bond market achieves this goal. Investing in bonds preserves capital without being risky, and serves as a hedge against what happens in equities markets. If you want to think outside the box, Gross says to do just that — by going global with your portfolio. Somebody, somewhere, is always making money.
Gross’s simple explanations of these complex concepts should alleviate the fears of many, and might persuade investors looking for a quick fix to hold steady in hopes better opportunities are around the bend.