Thursday, June 24, 2010

The Debts of the Lenders: Bill Gross Claims Stocks Will Outperform Bonds Within the Next Few Years

Continuing on the bond vein, Bill Gross of the famed PIMCO bond fund, came out today and said that now is the time to go long equities (when has he ever said that?). His argument is that the bond rally of 2008-2010 is at its peak and we'll see bonds lose their value as interest rates slowly climb.

I think he's got the right idea about the eventual return on assets but I have my doubts about his timing - especially after the Fed confirmed low rates again at this week's meeting. Continuing distress in European and US credit markets means that the 10 year yield may see 290 or lower. (The last time that occurred was in the dark days of Fall 2008 and early spring 2009).

Note - the right chart is of the 10 year yield which is inverse to price. The left chart is of the US corporate bond returns from July 2009 to the present.

If you are curious to know more information about bond returns click here to sort bonds by total return, yield, price, and volume.

The king of bonds is now talking up stocks as a better long-term investment. He says that as U.S. Treasury returns fall, investors will have to take more risk with high-yield bonds, equities and, eventually, real estate.

“If you're talking about the next 10, 15, 20 years, there's certainly the recognition that assets will grow faster in those categories,” he says. “Over the long term, stocks return more than bonds when appropriately priced at the beginning of an investment period.”
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