"We're in a highly levered economy where households can't afford to pay much more interest,"...

"We're in a highly levered economy where households can't afford to pay much more interest," writes Bill Gross, noting monthly payments on a 30-year mortgage have jumped 20-25% since January and mortgage applications have plummeted 39% in 2 months. He's not buying Bernanke's tough talk given the reality of our economy and the chairman's "helicopter" reputation. "Investors selling Treasurys (TLT, TBT) in anticipation the Fed will ease out of the market might be disappointed."

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Comments (28)
  • bdy
    , contributor
    Comments (159) | Send Message
    People who let Bill Gross manage their money will also be disappointed.
    25 Jun 2013, 03:40 PM Reply Like
  • Tony Pow
    , contributor
    Comments (8197) | Send Message
    No, they will be driven to the poor house.


    My contraETF to 20-yr Treasury is up 6% or 300% annualized (used to be 600).


    Everything you want to know about bonds but are afraid to ask:
    25 Jun 2013, 06:28 PM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1773) | Send Message
    and watch him dump TY futures if we break 2.60
    25 Jun 2013, 03:57 PM Reply Like
  • june1234
    , contributor
    Comments (4504) | Send Message
    He's right about rates A 39% drop in mortgage applications in 2 months cause mtg rates went up to 4.5% is a 39% drop in mortgage applications in 2 months. Of those apps 69% remain refis
    25 Jun 2013, 04:10 PM Reply Like
  • tomchiodo
    , contributor
    Comments (2) | Send Message
    Sounds like Bill Gross might be long TLT at 120 and under water.
    25 Jun 2013, 04:17 PM Reply Like
  • Robert Duval
    , contributor
    Comments (7852) | Send Message
    Definately. There sounds like a lot of folks caught big here.
    25 Jun 2013, 04:39 PM Reply Like
  • phdinsuntanning
    , contributor
    Comments (1357) | Send Message
    A 1% rise in interest rates would cost the banking system over $200bn in a year. So it is the banking/investment banks/hedge funds/ other funds network that is at the other side of the
    (mainly derivatives) trade, not “households”, come on Bill Gross,
    he knows they do not need to pay any interest to take their positions. If they need to pay interest for the money, basically to the monetary authority they might reduce their derivatives
    positions = end of the party. The Fed may tell the US Congress that their interest bill is going to rise, so they better cut their spending, and that he is going to have to find an extra one or two trillion to give to the banks. Now is central bankers against politicians: picking up a winner is easy. Conclusion: the reality is there is no going back from QE and this is an opportunity. The Chinese know that so they are getting rid of speculative capital in the hard way. Learn from their economic policies, not from their political economy!
    25 Jun 2013, 04:32 PM Reply Like
  • Drew Robertson
    , contributor
    Comments (373) | Send Message
    If Ben is right and more jobs are coming for the shlubs in those little brown boxes in Temecula then they'll be able to make those mortgage payments. If not, then more water bombs from the Fed.
    25 Jun 2013, 04:34 PM Reply Like
  • Robert Duval
    , contributor
    Comments (7852) | Send Message
    Beware of those who reassure you. If you don't sell they have more opportunity to. Hearing a lot of reassurance lately. Not buying it.
    25 Jun 2013, 04:41 PM Reply Like
  • steve4466
    , contributor
    Comments (170) | Send Message
    He's quite right. This is where the Fed is about to discover the flaw in its plans, because they think like economists rather than politicians. Whereas the need for QE was driven by business credit and banks' balance sheets, consumers have now become totally dependent on personal borrowing rates to remain low. Despite the Fed's independence, political reality says the tapering will take years longer than currently suggested. Unfortunately for the Fed, consumers have votes.
    25 Jun 2013, 04:45 PM Reply Like
  • Moon Kil Woong
    , contributor
    Comments (13621) | Send Message
    The Fed can't really control this. US Treasuries are rising because US Treasury auctions are growing with no new buyers besides their own QE program. As the Federal Reserve mops it up with QE there's less for it to allocate to help Fannie Mae and Freddie Mac out and no one else is willing to sell mortgages at these rates because they are 30 year loan money losers at these low rates and everyone knows it.


    That's why banks refuse to sell them unless they can immediately flip them to Fannie Mae or Freddie Mac. The housing market is as much a bubble as it was in 2008. The only difference is the government is now holding the bag.
    25 Jun 2013, 04:59 PM Reply Like
  • youngman442002
    , contributor
    Comments (5123) | Send Message
    I don´t see how they can get out of the drug trade they have us in...we are dependent on it now..and will want more in the future...we see a little up tick in rates and the world is coming to an end...lol...its trillions a year from here on out...there is no cutting spending in congress..just adding expenses with Obamacare and Amnesty...
    25 Jun 2013, 05:08 PM Reply Like
  • Gumby
    , contributor
    Comments (3678) | Send Message
    Lets try and see how it will turn out after we raise aluminium prices..
    25 Jun 2013, 05:14 PM Reply Like
  • Common Guy
    , contributor
    Comments (79) | Send Message
    And higher rates are going to clobber your fund Bill.......go to Bernanke and ask him for a bailout..lol!
    25 Jun 2013, 05:14 PM Reply Like
  • 7of9
    , contributor
    Comments (515) | Send Message
    Structural issues mentioned by Bill are facts. There is no disputing them.


    Fed did the right things, setting up QE exit expectations to reign in the asset bubbles and also being ever optimistic about the future of our economy. But as we all know, the Fed does not have good reputation for forecasting.


    Bill's scenarios is the most likely but there could be surprises. This rise in 10 yr rate is the last thing we need now on path to recovery. I'm thinking this blip in 10 yr rate is just that. A blip during a long period of low rates. Only bright spot in our economy is housing. Why slow down the only bright spot with 1% higher mortgage rate now? It does not make sense.
    25 Jun 2013, 05:40 PM Reply Like
  • Flod
    , contributor
    Comments (190) | Send Message
    He is right, investors are selling their treasurers in view of FED's further monitary easing. This may explain the increasing purchases in the housing market.
    25 Jun 2013, 05:41 PM Reply Like
  • Flod
    , contributor
    Comments (190) | Send Message
    Having a house I would like to invest in shares preferably with yearly dividend payments.
    25 Jun 2013, 05:52 PM Reply Like
  • Whitehawk
    , contributor
    Comments (3121) | Send Message
    Gross and Gundlach were both on the wrong side of these moves in the Treasury market. Perhaps many at the Fed were too. The selling pressure has come from foreign sources and met with additional short sellers that jumped on the trade. My guess is that we will see 3% on the 10yr but then a range trade from there. The 30yr had marked selling today, but it was underperforming the 10yr on the selloff.


    Can our economy handle higher rates? Yes - we are still well below 'normal' rates, it will have a moderating effect on prices. Continued asset price inflation is not a good development, while interest costs of a mortgage have been historically much higher in the past.
    25 Jun 2013, 06:55 PM Reply Like
  • 7of9
    , contributor
    Comments (515) | Send Message
    Houses are not being bought by people whose income is rising or those who got a higher paying job. They are being bought by investors due to low mortgage rates for a positive carry (rent - payment). I don't know who will sustaing the housing market when the investors flee. College grads are moving in with their parents rather than forming new households.
    25 Jun 2013, 07:14 PM Reply Like
  • evan.prospect
    , contributor
    Comments (704) | Send Message
    Thank you for mentioning forming new households.


    The baby echo-boom started in about 1982 and it lasted until about 2000. Only the oldest echo-boomers are in and reaching peak household formation years (ages 30-40). I'd venture to guess that we won't see durable and positive effects from the large echo-boom generation for another 2 or 3 years (when money velocity could also bounce back).


    Due to demographics and since the Fed decided to implement QE IV late last year, I just don't think pulling it back would be the best idea right now...the threat of deflation is too high and too many baby-boomers are retiring (downward pressure on demand) especially relative to echo-boomers forming households.


    I wish we had more quickly and more substantially flushed the bad debts in the financial system in 2009 and 2010 rather than stringing this "recovery" out nearly 5 years after the crisis. In contrast, Sweden had a financial crisis in the early 90's but was aggressive in flushing bad debts and they bounced back quickly. It appears the same thing is happening in Iceland. However, Japan never did after they nearly collapsed in the early 90's (see "zombie banks": http://bit.ly/14WuSUS) and the USA didn't really do it either.
    25 Jun 2013, 10:14 PM Reply Like
  • Tack
    , contributor
    Comments (16551) | Send Message
    How apropos that we get Bill's usual wailing on the very same day that it was announced that home prices made their largest one-month jump in history and while home sales volumes have recently accelerated.


    25 Jun 2013, 07:12 PM Reply Like
  • Abraxas
    , contributor
    Comments (297) | Send Message
    "Investors selling Treasurys (TLT, TBT) in anticipation the Fed will ease out of the market might be disappointed."


    What Gross really means is "our position is enormous, please don't sell Treasuries before we sell them, otherwise we, not you as intended, will end up losing lots of money!"
    25 Jun 2013, 07:25 PM Reply Like
  • johnaudio
    , contributor
    Comments (31) | Send Message
    As a saver, it feels good to see rates rise. When you get to 5% on the 10 year I'll buy back the bonds I sold last summer. I think it is about time. Stop buying bonds with fed money and make the people buy bonds with real money. I want my money to be worth something. Stop begging for the Fed to dilute your money! Get off your lazy butts and actually work for a living.
    25 Jun 2013, 08:58 PM Reply Like
  • Marco Mazzocco, CFA
    , contributor
    Comments (193) | Send Message
    Housing can survive higher rates. Most of what I've read lately is that its PE guys and other investors snapping up housing portfolios and then renting them out. As for Billy boy, I believe I also read about a month ago that Pimco total return fund had negative equity because they were so levered up on bonds, hence its making new 52 week lows.
    25 Jun 2013, 09:22 PM Reply Like
  • tough times
    , contributor
    Comments (57) | Send Message
    Gross sounds like he is already feeling the pain of higher rates ! This guy runs biggest bond fund in the world, Will he ever say that rates should go up? Never !
    With due regards to him,he is always giving his dooms-day forecasts all the time !
    Maybe, he went long TLT recently and is getting hurt !
    25 Jun 2013, 10:24 PM Reply Like
  • tough times
    , contributor
    Comments (57) | Send Message
    Maybe, Gross should beg Bernanke for another (eternal) QE !
    25 Jun 2013, 10:26 PM Reply Like
  • Tao Jaxx
    , contributor
    Comments (1472) | Send Message
    Feral hog grunting.
    Meaningless BS: mortgage rates remain at historical lows. Housing market's just fine and will remain so.
    Sorry Billy Boy: bar's closing, no more boozing up.
    26 Jun 2013, 12:09 AM Reply Like
  • medzjohn
    , contributor
    Comments (523) | Send Message
    It does seem that Ben has been saying put your money to work. It's not getting more valuable. Capital that doesn't adapt is liable to get swept away.
    26 Jun 2013, 01:15 AM Reply Like
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