Apr 252011

Will the bond market tank when the Fed stops buying Treasury paper in a few weeks? As reported in today’s Wall Street Journal, two of the biggest players in the fixed-income market are at polar opposites. They both can’t be right. As I told a friend today, this is why the Mariners still take the field when the Yankees are in town. You still have to play the game.

Pimco’s Bill Gross, who helps guide $1.2 trillion, thinks interest rates are headed higher. He thinks the yield on the 10-year note ought to be closer to 5.0% than the current 3.4%. His counterpart at Blackrock, Rick Rieder, who’s got nearly $1.6 trillion under his proverbial wing, says the end of Quantitative Easing (QE2) already reflected is in the price of Treasury securities.

I’m inclined to agree with Gross, who wrote this month (see Pimco’s web site):

  • Medicare, Medicaid and Social Security now account for 44% of total federal spending and are steadily rising.
  • Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden.
  • Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.

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