Bill Gross Thinks The 10yr Will Go To 3%

[pcoulter]

Henry,
In light of your recommendation to short bonds, what do you think of Bill Gross' thoughts that the 10 year treasury will yeild 3% in the future?

I got this from John Mauldin's website in this article:
http://www.2000wave.com/article.asp?id=mwo060305

[HenryTo]

Paul,

I am wary of it - since Gross is definitely the most authoritative voice when it comes to bonds. However, a subscriber kindly pointed me to the fact that Gross has been consistently predicting higher yields ahead over the last couple of years, and this never happened. In fact, if you go back to even the April 2005 commentary (http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2005/IO+April+2005.htm), you find this little paragraph towards the end of the commentary:

The fact is that this real interest rate journey to its current destination has pumped up all asset prices because they are all being discounted by an extremely low real interest rate. The current level has produced double-digit annual rates of appreciation for different asset classes at varying cycles—stocks and bonds first—commodities, collectibles and housing with a lag. The important point and critical element in a future forecast, however, is to recognize that real yields, whether they be short-term or further out the curve, bottomed in 2003 and have been moving higher ever since. Not only has the downward journey ended, but a mini up-cycle appears to be underway which ultimately reduces bond prices, stock P/Es and casts a negative pall on other asset classes.

March's commentary was no different: http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2005/March_IO_2005.htm

So the road, as most roads do, ultimately winds back to the central banker controlling the world’s reserve currency - Alan Greenspan. While he may have legitimate questions about why yields are so low in the face of rising Fed Funds, he indeed sits on a throne higher than his global counterparts. If he wants the 10-year Treasury at 4½%, he should just wave that Fed Funds scepter at a few more meetings, and there’ll be no bull bond market tsunami. Four percent is the floor for 10-year Treasury notes in my view.

The fact that all the major economists and analysts are predicting yet still higher bond prices (lower yields) right up ahead should at least given us a ST top in bond prices. Psychology is way too bullish here. Of course, another thing that is making me wary is that so far, I haven't gotten any flame mails from people that are bullish on bonds - which is bad from a contrarian standpoint!

Take care and be safe,

Henry