Bill Gross, the bond king over at PIMCO, has just published his latest monthly investment outlook.
He opens with a disturbing story from his days as a young sailor in the Navy in the late 1960's:
...A few years ago I wrote about the time that our ship (on my watch) was almost cut in half by an auto-piloted tanker at midnight, but never have I divulged the day that the USS Diachenko came within one degree of heeling over during a typhoon in the South China Sea. “Engage emergency ballast,” the Captain roared at yours truly – the one and only chief engineer. Little did he know that Ensign Gross had slept through his classes at Philadelphia’s damage control school and had no idea what he was talking about. I could hardly find the oil dipstick on my car back in San Diego, let alone conceive of emergency ballast procedures in 50 foot seas. And so…the ship rolled to starboard, the ship rolled to port, the ship heeled at the extreme to 36 degrees (within 1 degree, as I laterread in the ship’s manual, of the ultimate tipping point). One hundred sailors at risk, because of one twenty-three-year-old mechanically challenged officer, and a Captain who should have known better than to trust him.
We survived, and a year later I exited – the Diachenko and the Navy for good – theirs and mine. I think I heard a sigh of relief as I saluted the Captain for the last time...
Yikes.
Fortunately, Gross doesn't think that the bond market is a sinking ship. Rather he believes that the markets have gone too far
"[T]he 10-year Treasury – may be as much as 35 basis points too cheap. They belong in our opinion at 2.20% instead of 2.55%," he wrote.
Here's a summary of why he thinks this:
- The Fed’s forecast of the economy which prompted tapering panic is far too optimistic.
- Inflation, according to the Fed’s own statistics is running close to a 1% pace.
- Yields have adjusted by too much.
"We may have reached an inflection point of low Treasury, mortgage and corporate yields in late April, but this is overdone," he writes. "Will there be smooth sailing tomorrow? “Red sky at night, sailors delight?” Hardly. Will you be able to replicate annualized returns in bonds and stocks for the past 20–30 years? Hardly. Expect 3–5% for both"
Read the whole letter at PIMCO.com.
SEE ALSO: Wall Street's Brightest Minds Reveal THE MOST IMPORTANT CHARTS IN THE WORLD