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 recent conference panel devoted to macroeconomic 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 last month 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 0 percent, and how to invest in such an environment.
Scott Mather, Pimco’s head of global portfolio management, 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 monetary policies at the central banks, which are printing money to inject liquidity into the system and boost sagging economic activity. They have also slashed interest rates to historically low amounts in some countries, and Mather said these rates will likely remain at rock-bottom levels in 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. Too much debt leads to defaults among households, companies and governments. It’s disruptive to real economic activity.”
With U.S. interest rates so low, Mather said, people holding cash are experiencing a tax through inflation. He suggests that investors shift their focus away from developed countries with activist central banks, high government debt levels and paltry interest rates. Instead, investors should reconsider emerging countries; though these countries have been seen as risky in the past, they might be 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 prevalent role of the U.S., Europe and Japan in many global indexes. “Investors need to get away from their home bias mind set.”
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.
Colas said investors in the current low-yield environment should find fixed-income substitutes like “reasonable” dividend-yielding stocks. He also believes that, in a landscape where things are increasingly correlated, precious metals are less so.
Dennis Gartman, publisher of The Gartman Letter, still thinks bonds are a good place to be, even if the 30-year bond market rally is probably in the early stages of its much-anticipated reversal.
“The action in the bond market tells me it’s the right place to be,” he said, adding that the unwinding of the long rally will likely be a slow process.
That said, these bonds are sensitive to the laws of physics. He cautioned that when interest rates are so low, small rate movements can have “egregiously large” implications on bond prices.
“You need to be really, really, really, really careful,” Gartman said.
No Need To Sweat The End Of 30-Year Bond Rally
March 6, 2013
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