Income Investing: Did The Bond Guru Cave In?

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The explosion that rocked Wall Street last week was bond guru Bill Gross’s (PIMCO) admission that he has turned bearish and that worldwide stronger economic growth over the next few years will lead to higher interest rates.

Bond prices tanked, yields rose and real estate funds/ETFs headed south. Some media had a hard time comprehending why Mr. Gross changed his position after having been a long-term bond bull. Did he cave in?

Not in my view. PIMCO is in the investment business and fundamentals, even for those with a very long-term view, change from time to time. I like the quote from famous economist John Maynard Keynes best who said, when encountering criticism about his change in viewpoint, that “when the facts change, I change my mind—what do you do, sir?”

What are some of the effects of higher rates? A good analysis to read is Michael Shedlock’s story on “The Bond King’s Capitulation.”

Of course, the trend to higher rates will be a severe handicap for the Fed in potentially bailing out the most troublesome weak spots in the economy, namely SubPrime and Real Estate.


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