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From PIMCO bond manager Bill Gross' latest monthly essay:

Why then should the Fed be stopping [raising interest rates] and the bond market have bottomed in early July? The overarching reason is that 425 basis points of short-term hikes and the concomitant tightening of the yield curve in the past several years has been more than enough to slow economic growth and contain inflation. That’s a bold statement to make in the face of an apparently still strong domestic economy, a booming global environment, and accelerating core CPI numbers, but PIMCO’s cyclical analysis would suggest that it is justified.

No doubt, Asian and Euroland growth is acting as a strong magnet for U.S. exports but the tightening cycle in the U.S. seems to have run its course, primarily because of its effect on housing and related repercussions on consumer spending and economic activity.

To gauge the relationship between Fed tightening/housing/and the domestic economy PIMCO looks at a number of evolving relationships including the rather dominant connection between Fed action and economic activity which tends to span 12-18 months in terms of lead times. Having begun tightening over 24 months ago, we should be experiencing a slowdown by now and in fact we are. Consumption, employment, and even capital spending aggregates are on a downward growth path, not at a pace that would indicate recession, but something more indicative of a 2% real GDP economy with probabilities for even lower percentages as we move toward year-end. Recession/no recession is really a faux decision to be entertaining at bond market turning points. Any number of cyclical histories point toward bond market prices bottoming – and the Fed peaking – as the economy downshifts into second or first gear as opposed to breaking to a full stop.

Editor's note: Investors that agree with Mr Gross can buy bonds most easily through the bond ETFs:

  • iShares Lehman Aggregate Bond Fund (AGG)
  • iShares Lehman 7-10 Year Treasury Bond Fund (IEF)
  • iShares Lehman 1-3 Year Treasury Bond Fund (SHY)
  • iShares Lehman 20+ Year Treasury Bond Fund (TLT)
  • iShares GS $ InvesTop Corporate Bond Fund (LQD)
Source: Bill Gross: Bond Prices Have Bottomed