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How the Bond Markets React
A New Weekly Fixed Income Feature at the BlueCollarDollar
04.20.04
Inflation Revisited

The bond markets have been under some considerable pressure of late. When the Consumer Price Index was released last week, that pressure became even more burdensome creating opportunities in some markets, exposing lies in others, and otherwise signaling the end of easy money.

Opportunities come along every now and again. The problem has always been simple. Whom can you trust? When Bill Gross of the Pimco Bonds recently pointed towards purchasing insurance against inflation in the form of Treasury Inflation Protected Securities, many folks followed that advice and the result came in higher prices with lower yields. Now, these securities may not be better than owning equities that have rich dividend yields.

But Mr. Gross didn't stop there. In a newsletter released on April 10th, the bond guru warned that duration could become a problem for bond investors as the economy re-inflates. In other words, in an interest rate rising environment, the deficit becomes more cumbersome. Currently, with inflation at 1%, this debt can be considered manageable. Anything higher, and the current weight of this nation's debt will be exposed for what it is - crippling at best.

But what worries Mr. Gross is duration. He called it thrice damned - "damned if you shorten, damned if you lengthen, damned if you don't do a thing". In his view, the U.S. and Japan have some serious issues to contend with should inflation begin to take on some serious upside. These two countries could be problematic for investors as opposed to fixed income investments in what Mr. Gross refers to as "vigilant" countries such as Europe and the U.K.