PIMCO's Gross Suggests Investors Start Practicing 'Rational Temperance'
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Bill Gross
PIMCO's Bill Gross issued his Investment Outlook for the month of March 2013. The article is entitled: "Rational Temperance."
Key points:
Key quote: "Corporate credit and high yield bonds are somewhat exuberantly and irrationally priced. Spreads are tight, corporate profit margins are at record peaks with room to fall, and the economy is still fragile. Still that doesn’t mean you should vacate your portfolio of them. It just implies that recent double-digit returns are unlikely to be replicated and that when today’s 5-6% high yield interest rates are adjusted for future defaults and recovery values, that 3-4% realized returns are the likely outcome."
For the full letter, click here.
U.S. markets are indicated for a higher open Wednesday.
Key points:
- Chairman Greenspan’s “irrational exuberance” speech in 1996 posed an excellent question, and history provided the answer.
- Fed Governor Jeremy Stein asks the same question in 2013 with a uni-dimensional but useful model.
- Stein’s paper, accompanied by correlations from Bianco Research, suggests caution in today’s high yield market.
- High yield bonds, stock prices and other risk spreads move in relative tandem.
- PIMCO cautions “rational temperance”: be bullish if you want, but lower return expectations on all asset classes.
Key quote: "Corporate credit and high yield bonds are somewhat exuberantly and irrationally priced. Spreads are tight, corporate profit margins are at record peaks with room to fall, and the economy is still fragile. Still that doesn’t mean you should vacate your portfolio of them. It just implies that recent double-digit returns are unlikely to be replicated and that when today’s 5-6% high yield interest rates are adjusted for future defaults and recovery values, that 3-4% realized returns are the likely outcome."
For the full letter, click here.
U.S. markets are indicated for a higher open Wednesday.
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William H. Gross, Pacific Investment Management Company, LLC (PIMCO)Sign up for StreetInsider Free!
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