Slowing economic growth is usually a positive for bonds.
Bill Gross, founder and manager of PIMCO’s giant Total Return fund, said this week that he is negative on U.S. debt and has dumped all U.S. treasury bonds from his fund. And even that may be a buy signal.
On slowing global economic growth, reports this week from China, the world’s 2nd largest economy, and Japan, the world’s 3rd largest economy, were discouraging.
Japan’s economic growth for the 4th quarter of last year was revised downward to a negative 1.3%. It will not be improved by the devastating earthquake and Tsunami.
China’s economy has been sitting on a real-estate bubble for some time, with 64 million empty housing units created by speculators taking advantage of easy money policies and rising real estate prices. The Chinese government has been aggressively tightening policies and raising interest rates to cool off its economy and ward off rising inflation, with little effect so far. That has raised global concerns that China will have to tighten so much to prevent an inflationary spiral that it will bring its economy in for a hard landing, into a recession. Those fears gained credibility when China shocked global markets with the report Thursday that its economy experienced a surprise trade deficit in February, as the cost of imports, influenced by surging commodity prices, exceeded the value of its exports.
Meanwhile, the world’s largest economy, the U.S., is not free of concerns. After months of improving economic conditions, reports this week were of an unexpected 15% increase in the U.S. trade-deficit, a sizable decline in consumer confidence, and oil prices that have spiked to the level reached in October, 2007, ($96 a barrel), when the U.S. economy began slowing into what became the ‘Great Recession’ of 2007-2009.
Bonds are also attractive as a safe haven in stock market corrections, and many important global stock markets, including China, Brazil, Hong Kong and India, topped out in November and have been down 12% to 17% in corrections since. The major markets in Europe, which had been holding up well along with the U.S. market, have been down 11 of the last 15 trading sessions, now down about 5% from their levels of three weeks ago.
Our technical indicators, which triggered a timely sell signal for bonds in November, reversed to a buy signal a few weeks ago, and indicate that money is flowing back into bonds.
Yes, Bill Gross, known as ‘the bond king’, the famed founder and manager of PIMCO’s $237 billion Total Return Fund, received a lot of media attention this week when he revealed that he had dumped all the fund’s holdings in U.S. treasury bonds as of February 28.
But even that could be a buy signal. Bonds have had an uncanny way of often moving opposite to Gross’s public prognostications.
For instance, four years ago, in June of 2007, Gross predicted U.S. treasury bonds were in trouble and headed for a bear market. Instead, June, 2007, was an excellent time to buy bonds. The 30-year bonds had been in a 7-month correction, and in June reversed into a 9-month rally in which they gained 17%.
More recently, in an interview in Time magazine in early 2010, Gross predicted interest rates were about to begin rising. Bonds move opposite to interest rates, so a rise in rates would be a big negative for bonds. However, once again bonds had already been in a big correction, this time from their highs in early 2009. And instead or rising, interest rates and the yield on bonds began to decline, and Treasury bonds launched into an impressive six-month rally in which 30-year treasury bonds gained 20%.
So now, after the 30-year bond has declined 15% in another six-month correction, Gross is bearish on bonds again, and says he dumped all of his fund’s treasuries as of February 28.
He might be right this time. But it’s interesting that the 30-year bond reached what has so far been the low of its recent correction on February 8, and has rallied up 4% since.
So in spite of Gross’s warnings on U.S. treasury bonds, and the general bearish investor sentiment against them, I believe treasury bonds are oversold again, and are presenting investors with another buying opportunity.
If you agree, bond ETFs to consider include the iShares Lehman 20+ Year Treasury Bond (NYSEARCA:TLT), the iShares Lehman 1-3 Yr Treasury bond (NYSEARCA:SHY), and the Schwab Intermediate-term U.S. Treasury (NYSEARCA:SCHR).
Disclosure: In the interest of full disclosure I and my subscribers have a position in TLT.