Interest Rates Have To Go Up. The “Bond King” Says No

FORECASTS & TRENDS E-LETTER

by Gary D. Halbert

May 20, 2014

IN THIS ISSUE:

1. PIMCO’s Bill Gross Says Interest Rates Are Going Lower

2. Social Security at 62? Not a Good Idea For Most!

Overview

The prevailing view on Wall Street and Main Street is that medium and long-term interest rates have to go higher in the months and years ahead. Interest rates have to get back to “normal” at some point, so we’re told. Yet in the last several months, yields on 10-year Treasury notes and 30-year Treasury bonds have fallen rather significantly. What’s up with that?

Last week, PIMCO’s founder Bill Gross – aka the “Bond King” (because he runs the largest bond fund in the world) – predicted that medium and long-term rates are going down, not up. For reasons I’ll explain below, Gross makes a case for falling yields going forward. His latest prediction is clearly out of step with the mainstream, but I thought you would appreciate his thinking, even if you disagree.

Next, some new data reveal that over 40% of retiring Americans start taking Social Security benefits at age 62, which means they will get less money overall than if they had waited until later. In most cases, you should delay taking Social Security benefits until age 70 if possible. Given that we are in the investment/financial planning business, we are often asked for advice on when to take Social Security.

As it turns out, the best article I’ve ever read on this subject appeared over the weekend in RealClearMarkets.com. The piece is written by award-winning author and lecturer John F. Wasik. Today, I’ll reprint that article in its entirety. Even if you’ve already had to decide when to take Social Security, this article would be good to pass on to others who are nearing Social Security eligibility.

Interest Rates Have To Go Up. The “Bond King” Says No

We all know that long-term interest rates have to go up, perhaps significantly, before too long, right? That is the prevailing view on Wall Street and Main Street. That’s what the financial futures markets are pricing in. The Fed is tapering its bond buying program that was designed to keep long-term rates low and intends to stop QE altogether before the end of this year.

Yet in the last several months, Treasury bond yields have fallen rather sharply, as you can see in the 30-year T-bond chart below. When yields fall, the value of bonds goes up. So why are bond yields falling when most agree that long rates have to go up in the future?

Interest Rates treasury bonds

The bellwether 30-year Treasury bond yield has tumbled from a high above 3.7% in March to 3.3% today. That’s a significant move given the prevailing view that rates have to go up. Not so says PIMCO’s Bill Gross. He and PIMCO believe that the next trend in long rates is DOWN, not up. I’ll explain their latest forecast below.

For those not familiar, PIMCO is one of the largest investment management firms in the world. PIMCO stands for Pacific Investment Management Company, LLC headquartered in Newport Beach, California with some 2,400 employees worldwide. PIMCO reportedly had almost $2 trillion in assets under management at the end of last year.

Bill Gross is PIMCO’s outspoken founder, CEO and the portfolio manager for the world’s largest bond fund – the PIMCO Total Return Fund which had over $292 billion in assets at its peak. Mr. Gross is most often referred to as the “Bond King.” However, after leading the industry in returns since 1987, the Total Return Fund underperformed over the last year or so. As a result, the fund has seen redemptions which have reduced its size to $230 billion as of the end of April. Still, it remains the largest bond fund in the world.

I tell you all of that to get to my main point today. Each year, PIMCO holds what the firm calls its “Secular Outlook Forum” during which investment professionals from its 13 global offices gather for an examination of critical factors affecting economies and markets over the next three to five years. The 2014 Forum was held earlier this month, and here are the conclusions.

First, the PIMCO Forum concluded that the global economic recovery will continue, led by the US, but that overall growth will be very slow over the next three to five years. The primary reason that economic growth will be slow, according to PIMCO, is that global debt is at an all-time high. The Bank For International Settlements (BIS) just reported last week that global debt outstanding hit a new record above $100 trillion in 2013!

interest rates global debt

Second, because of its outlook for continued weak global economic growth, PIMCO now expects that intermediate and long-term interest rates will FALL over the next several years. Yes, you read that correctly. They believe that the 10-year Treasury note and the 30-year Treasury bond rates can and will move lower, not higher over the next three-to-five years.

While not making a prediction, PIMCO’s Bill Gross said it’s not inconceivable that the 10-year T-note yield – currently just above 2.5% – could fall as low as 2.0% in the next few years.  If that were to happen, it would imply that the yield on 30-year T-bonds would fall well below 3% again as it did in the spring and summer of 2012.

Mr. Gross adds that he thinks it will be several more years before the Fed and other central bankers around the world abandon ZIRP (zero interest rate policies). Most forecasters, and the markets, expect the Fed to begin raising interest rates by mid-next year. Mr. Gross disagrees.

So what are we to make of these latest macro predictions by PIMCO? There are a lot of really savvy folks who work with Bill Gross at PIMCO, so I’m not going to say their latest forecasts are wrong. What I will say is that I know of no other respected forecaster that is predicting interest rates remotely that low in the next few years.

But when the manager of the largest bond fund in the world tells you that interest rates are going even lower, you have to stop and consider that possibility. That’s why I try and stay on top of developments in the financial world. Otherwise, you would probably never hear about such predictions.

We’ll see. I will keep you posted.

Next, here’s the best article I’ve read on when to begin taking Social Security benefits:

Social Security at 62? Let’s Run the Numbers
by John F. Wasik

For many retirees, Social Security benefits are seen as hot money on the table, to be devoured as soon as possible. But as with preparing and savoring a fine meal, a careful approach and delayed gratification may yield the highest rewards from the program.

Many financial planners advise that you wait as long as possible before receiving benefits. Despite this, a sizable number of Americans who have reached 62 — 41 percent of men and 46 percent of women — apply for Social Security at 62, the earliest age at which you can

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