The new normal we continue to hear about should refer to the rise of emerging markets as a percentage of global GDP and not the potential sub optimal growth of domestic U.S. GDP. Between 1960 and 2000, the GDP of emerging markets fluctuated between 18 and 22% of global growth. It was only most recently that they broke out to represent close to 30%, reflecting the importance of having a direct or indirect exposure to this important asset class. The key must be in balancing the associated risk and increased volatility that is inherent.
Has the bond bubble been pierced? The Fed has embarked upon QEII. The bond purchase program, that is, not the luxury cruise liner. So, with a constant buyer lurking in the market and one with an exceptionally deep set of pockets, why are rates rising?
One could argue the recent economic data would command higher rates. You could perhaps point to growing expectations of a re-ignition of those inflationary embers that have investors nervous. Or we could look at the most obvious; rates have been held at artificially depressed levels that were unsustainable. Consider investing in a country’s debt, one with ballooning budget deficits, stubbornly high unemployment and a central bank printing dineros as quickly as we can process trees. No, I’m not talking about Spain, Greece, or the mother ship (Ireland), I’m talking about the good ole US of A. POP!
Closed end bond funds were among the exchanges leaders in hitting fifty two week lows recently. Now that sell side analysts and brokers have lured individual investors into the “safety” trap of bond funds, institutional investors are running for cover. This forces prices down and yields up. POP!
In a sign of clearly “talking up one's position” Pimco’s renowned bond guru, Bill Gross recently stated he was investing his own money into bonds. $17 million to be exact into bond funds. This had the band of folks looking to ride his coattails into prosperity jumping in, resulting in a bit of bounce. While the number seems rather large, Bill Gross’ net worth was recently calculated at close to $2 billion. $17 million of $2 billion really isn’t much of a statement and to these eyes appear to be one bond fund king talking up his own position. POP!
My early take is for 10-year Treasury yields to finish 2011 at closer to 5% than 3%. My current sense is QEII should not morph into QEIII or IV. Doing so would help nosedive the value of the dollar and potentially sink the economy. Chairman Bernanke does not in action anyway resemble Captain Edward Smith, (although both were fully facially follicled) anymore that the Good ole US of A resembles the Titanic.
For income investors the potential for growth and above average Income can be had in the Blackrock Global Fund- BOE. BOE is a diversified fund that when launched priced at $25 a share with the objective of paying out 9%. Since that date, even during the near collapse of our markets, BOE continued to prudently pay its hefty dividend. As the global market and economies continue to heal, investors are well compensated by the hefty yield of 12.6% at current levels as well as the opportunity for capital appreciation.
In a note of full disclosure I may currently own or look to own in the future for myself and my client shares of Blackrock Global Fund-BOE. Before making any investment decisions please perform your own due diligence and contact your investment professional.
Have a terrific holiday.
Disclosure: I am long BOE.