Historically low interest rates will someday rise and the 30-year bull market for bonds will eventually end, but a group of investment strategists who weighed in on a conference panel devoted to macro economic conditions seemed to agree that the end won't be swift or cataclysmic.
"My basic take is that bonds will be fine and that investors don't have to freak out about inflation because we have an economy that's too slow to worry about that," said Nicholas Colas, chief market strategist at ConvergeEx Group. He spoke Monday at the IndexUniverse Inside ETFs conference in Hollywood, Fla.
A good chunk of the discussion that Colas and his fellow panelists hashed over pertained to investor risks in a world where short-term interest rates hover near zero percent, and how to invest in such an environment.
Scott Mather, Pimco's head of global portfolio management, posited that central banks are dominating the financial markets like never before. "You can't find an asset that's not inflated by monetary policy," he said.
Mather said he believes we're in for a long period of below-average interest rates in many regions of the world due to a huge debt overhang, particularly in developed nations. The debt is being created by aggressive central bank monetary policies that are essentially printing money to inject liquidity into the system to boost sagging economic activity. Part of the banks' tool set included ratcheting down interest rates to historically low levels in some countries, and Mather said these rates will likely remain at rock bottom levels for the near-term because it helps governments pay down their debt burden.
But such low rates, he cautioned, come with a downside: "The world is riskier the longer this [heavy national debt] goes on."
Dennis Gartman, the outspoken publisher of The Gartman Letter, took exception with Mather's analysis. "What does the debt level have to do with risk?" he asked. "The argument that there's more risk now than ever before is wrong. There's always been risk."
That launched a spirited reply from Mather and some of the other panelists.
"Too much debt leads to defaults among households, companies and governments," Mather countered. "It's disruptive to real economic activity."
Colas concurred that too much government debt is problematic. "When the Federal Reserve owns 40 percent of the yield curve [which he defined as Treasury bills, notes and bonds with more than five years in duration], we're in unchartered territory," he said. "To bury your head in the sand is naive."
How To Invest
With U.S. interest rates so low, Mather said, people holding cash are experiencing a tax through inflation. As such, he suggests that investors shift their focus away from developed countries with activist central banks, high government debt levels and paltry interest rates in favor of countries that traditionally were seen as riskier in the past but are now on sounder financial footing than their more developed counterparts.
"Most investors in an index fund are exposed to countries with the most risk," said Mather, citing the U.S. Europe and Japan's prevalent role in many global indexes. "Investors need to get away from their home bias mindset."
He said Pimco believes that bond yields will remain constrained over the next several years, but that dislocations will occasionally occur in the different pockets of the fixed-income market.
"You need active strategies to pick up a few percentage points in yield that's been taken away by central banks," Mather said.