"If you’re on the wrong end of an interest rate teeter totter headed up, it makes you wonder why anyone would own bonds or at least why anyone would own longer-term bonds," writes Bill Gross (BOND) after closing out a rough 2013. "That question and its answer are the key for 2014."
Stop worrying so much about that number coming out on the first (occasionally 2nd) Friday of each month, he says, as inflation, not unemployment will be the critical statistic for gauging Fed policy going forward (the PCE is release around the 20th each month). There will be no policy hike until both unemployment and inflation breach their thresholds, says Gross, and they're not even thresholds; "they're forks in the road that may, or may not lead in a different direction." At the moment, annualized PCE inflation of 1.2% is nowhere near the target of 2%.
Gross isn't calling for a bond bull market, but - if he's right about inflation - it will be realistic to expect positive fixed income returns in 2014.