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[augieboo]

PIMCO on Bonds -- Here are excerpts from two recent Pimco pieces on the bond market. The authors, Lee Thomas and Paul McCulley, have rather different takes: Thomas says "sell bonds" while McCulley says don't short the bond market, but stick to short maturities.

Both good pieces IMDO.

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The Road Ahead
Global Markets Watch
Dr. Lee R. Thomas, III June 2003

Where will it all end? Well, wherever it ends, it is unlikely to be bond heaven. Today’s investor confronts as undemanding a bond decision as he or she ever is likely to face. Consider the case against bonds:

Among the chief problems facing the U.S. economy today is debtors with not enough equity to support their liabilities. A little inflation will make it easier for debtors – individuals and corporations alike – to repair their balance sheets.

So you might conclude that the nation’s economic leaders would like to see inflation rise. You would be right. This country’s head central banker has said he would like companies to have more “pricing power.”

The Fed’s rhetoric has been matched by action. Not only is the Fed very loose, it has signaled it is willing to get even looser.

At the same time, the U.S. is moving from a modest federal government surplus to a substantial deficit. The administration is committed to new defense spending and also to cutting taxes. So common sense says the deficit is likely to grow further.

The dollar is falling.
Putting it all together, the bond market’s fundamentals are as one-sided as they ever will get. The Fed-on-steroids policy of the past few years always was likely to create another bubble in something, and many observers (myself included) expected the bubble to appear in real-estate prices. It has, at least in some property markets. But a much bigger bubble has developed in bonds. That is where the greater opportunity for wealth destruction now lies. Bonds are priced for perfection. In the upside-down world of bonds, “perfection” means economic collapse. So, unless you expect the U.S. to do a Japan-like swoon, you cannot rationalize long-maturity bond yields where they are today.

Sell bonds.

LINK TO FULL ARTICLE: http://www.pimco.com/leftnav_generic_frm.asp?page=/gmw/June03/index.htm


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Promiscuity In The Pursuit Of Virtue
Paul A. McCulley
July 10, 2003

The Bottom Line
I believe the Treasury market is in a “rational” bubble, because the intermediate term global economic outlook is a bi-modal one, rather than a “normal” bell curve. Put more bluntly, Keynesian reflationary policies will work and inflation will go up, or they won’t work and deflation will unfold. A perpetual muddle-along scenario, the easiest one in the world to predict, is also, I think, the least likely.

As long as this is the lay of the economic land, Treasuries (swaps) are both too rich to buy and too cheap to sell. Not a pleasant place for an active portfolio manager: If it’s a bubble, playing it on the long side is a bigger fool game, but if it is not a bubble, playing it on the short side is a foolish game. The “truth” will be revealed only in the fullness of time.

Until it is, a close-to-index duration stance is the right posture for active fixed income managers, particularly after the vicious sell-off of the last several weeks. In a world of a “rational” bubble, the rational portfolio manager must worry more about being wrong than being right.

The name of the game must be to stay in the game, until time is full.

LINK TO FULL ARTICLE: http://www.pimco.com/leftnav_generic_frm.asp?page=/ff/July03/index.htm