Permanently on the whiteboard of Pimco's Investment Committee boardroom is its concentric circles of asset classes, with the Fed Funds rate occupying the center and stocks and real estate far on the outside. "Change the price of credit at the center and you change the price of assets at the outer extremities," writes Bill Gross.
Risk assets may be high-priced, but they're not necessarily mis-priced as long as ZIRP continues. Key, says Gross, drawing on Yeats' "Second Coming," is whether the center holds, i.e. can investors be convinced of the Fed's credibility as it shifts from a quantitative to qualitative assessment of whether to tighten policy.
"Artificial prices will not be mis-priced if circling falcons can be convinced of the efficacy of qualitative forward guidance. We believe that will be the case. Carry trades, then, in numerous forms should be profitable."
Redemptions from Gross' Total Return Fund (ETF version: BOND) slowed to $1.6B in February, the slowest pace of outflows since the bond market blew up last May.