Fed Doubles 10 Year Note Interest Rate

Buffett vs. Gross vs. Blankfein: For every bond bear there’s a bull

May 6, 2013, 12:35 PM

Asked about the bond market Monday morning on CNBC, Berkshire Hathaway Chairman Warren Buffett might as well have held his nose when he called fixed income “a terrible investment right now.”.  With the Federal Reserve  holding down yields via its bond-buy program, the “Oracle of Omaha” is far from the only one calling the bond market overpriced.

Reuters

Warren Buffett

But on the other end of the spectrum, bond bulls are saying that predictions of the demise of the asset class are overdone. As The Wall Street Journal wrote on Sunday, bond bears were making the same calls in the beginning of 2010, 2011, and 2012; those predictions led to lower yields as the year went on. (For predictions of a 2013 collapse, see MarketWatch’s March report: Bond rally shows fresh signs of fatigue.)

Treasury yields spiked significantly on Friday after a better-than-expected jobless report. Nonetheless, the 10-year Treasury note  10_YEAR -0.51% continues to hover around 1.75%, far from indicating a near-term bubble collapse.

For every bond bear there is also a bull. Taken together, their contrary viewpoints have started to resemble a verbal spat. Let’s take a look at some of the more notable recent bond market pontificators.

Bulls:

Jeffrey Gundlach: The DoubleLine DBLFX  CEO has doesn’t believe there’s a bond bubble because the Federal Reserve will continue to maintain its asset purchase program that helps keep interest rates low. He told the Journal on Sunday: “It’s not timely to be betting on higher interest rates.”

Bill Gross: The Total Return Fund PTTAX -0.09% manager was wavered on his bullishness for bonds. But he said in April that he was purchasing Treasury notes, driven by the Bank of Japan’s aggressive easing decisions, which could push Japanese investors into the U.S. markets. “This BOJ printing seeps out daily into global markets as Japanese institutions, which have sold their Japanese government bonds to the BOJ, look for higher-yielding replacements,” he told the Journal.

Rick Rieder: The BlackRock BLK  chief investment officer had been underweight long-term Treasury bonds, but in April, BlackRock picked up the longest duration 30-year Treasury bonds. Bond yields will still rise, he told the Journal, but perhaps not as quickly as initially expected. And if the U.S. continues to have weak economic data, yields could drop even more, Rieder said.

Bears:

Lloyd Blankfein: Goldman Sachs GS -0.14%, led by macro research head Dominic Wilson, has long said yields will rise, leading to a selloff before the end of the year. Nonetheless, Goldman analysts don’t expect the bubble to burst as dramatically as it did in 1994, when the Federal Reserve doubled the interest rate on 10-year Treasury notes. But Lloyd Blankfein, CEO of the investment bank, isn’t as convinced the bubble is benign. “I worry now. I look out of the corner of my eye to the ’94 period,” he said at a May 2 conference, Bloomberg reported.

Bank of America Merrill Lynch: BofA BAC -0.08% analyst Michael Hartnett wrote last month that there was a war going on, “between deflationary debt fundamentals and aggressive reflationary policies” as a way of explaining the contradictions in our current global economy. Nonetheless, he sees a great rotation continuing to take its toll across the financial markets over the next few years, part of which includes a shift from credit to equity.

Jim Rogers: Back in February, when the bond market was showing more signs of wear and tear, the venerated investor said he was going bearish on government debt. He told Bloomberg Radio: “I’m short long-term government bonds. I plan to short more. That bull market, that’s a bubble.”