From Gross, fully agree:
If the home asset bubble stops expanding, deflates, or pops any time soon (and I suspect we are only a few short months from at least the first of these three) then the potential for Greenspan’s "debt liquidation" follow-on is something that investors must begin to prepare for. Debt liquidation, as opposed to loan growth, slows an economy or sinks it into recession, generating the higher risk premiums that the Chairman warns us lie ahead. What should an anticipatory bond manager do with the possibility of such circumstances drawing closer by the day? Cut the fat from his portfolio that’s what. Swallow the castor oil, go on a temporary fast and prepare for the system to eliminate its waste. (Sorry folks, but I had to tie it in somewhere.) That means a focus on high-quality investments with anticipation for an eventual Fed easing at some point in 2006. I believe that 4% will cap this Fed Chairman’s last bear market tightening and that his successor will quickly be confronted with the necessity to lower rates once again. A bullish orientation towards the front-end of the curve therefore should begin to dominate bond strategies, combined with an avoidance of anything that carries those low-risk premiums that Greenspan finally diagnosed. Those assets include real estate, equities, high yield, corporate, and some areas of emerging market debt. They also include, by the way, long-term Treasuries or any longer-dated government paper that has been lowered in yield in the past by Greenspan’s own "measured" transparency over the past 16 months. That is not to say that long government bonds won’t go up in price if the "system" suffers some elimination, slower growth, or to be frank, a recession in 2006. It’s just to acknowledge that the better duration-weighted paper lies at the front-end of the curve, especially now that it provides similar yields to longer maturities. |
