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Watch Why a Tight Fed Gives Bond Investors an Opportunity - Bloomberg

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00:00Tony, should I be nervous about a 5% two year yield each time? Hey, Damian. No, You should be happy. You should be pinching yourself. You should be blissful. We haven't seen these yields in a quite a long time. And it's one of the reasons why many people think that the US economy is faring better. There's a story on Bloomberg today about it. Interest income in the United States is about $1.8 trillion today. That's up $300 billion from two years ago, $300 billion. But the downside? I'm going to blame the media for this. Interest rates, yes, of course. Price down yields. Yeah. But, you know, and you've codified in all your books, including the great stadiums, 2000 pages, you've kind of thought as if there's an ambiguity here. Explain the ambiguity. The price down yield up can be good for our listeners. Well, here's here's a statistic going back several decades. The five year looking out five years in terms of what you're likely to get in terms of a total return. Looking at the Bloomberg aggregate, which is a pretty much a compilation. Let me tell you what that is. Well, by the way, on Lehman, I worked for Lehman Brothers in 1980s in the World Trade Center, 104th floor with a view of uptown, a remarkable period that was. But so looking back at looking at the Bloomberg aggregate today, which is 40% U.S. Treasuries, 25% mortgages, 25% corporate bonds, the yield is five and a quarter percent. Now, if you take that figure, it's that starting yield should be the return you get the next five years based on the 30 year history of it. The rolling return over a multi-year period should equate to what you see as a stated yield today. So five and a quarter percent, is that good enough for some investors? Maybe not. That's why heels are rising, prices are falling. They're selling. They think yields will go higher. But I would suggest to investors that they be careful about the story now. And what I would suggest is thinking about the three don'ts, about what to do in terms of investing that we're often asked about what to do, here's what not to do. Four for one, don't try to time the market. Awfully difficult to do. Second, make sure perhaps don't catch a falling knife, but do catch these yields while you can. This yields could slip away. And finally, don't fight the Fed. And Tom and Damon, you might think this means while the Federal Reserve is keeping policy tight, that's a bad thing. But it's tough love. The more it stays tight and is getting tighter based on a definition of what is tight. A high and a low at falling inflation rate. And it is falling 2.8%. PCE versus a 5% yield. It was almost equal last year. Fighting the Fed today means believing this. The central bank will be successful in its quest to bring inflation down. Has every means of an ability to do that. Tom, did you did you see Tony wink at me when he said, don't be a short termist to actually invest for the long term? I mean, he's he knows you're looking at me. He ain't no sure act. I'm reading your notes, Tony. And I got to say, don't fixate on the Fed's 2% objective. Focus instead on the notion of, quote unquote, my favorite idea, stability that reads like the South China Morning Post. Price stability. What is price stability mean? So I'm really old timers much younger than me. But I recall a period before 2012, and I got to tell you what that means when we didn't have a 2% price objective to go on, we had to go on something else. And what was that something else? The notion that prices are stable or they're not. So it was in 2012 that Ben Bernanke, the Fed former Fed chair, implemented the idea of a price objective. Prior to that, called in 1967 is eighties 1950s wasn't an investor have to go on to drive prices higher or lower. They had to decide are prices stable? Now if we fixate as investors on the 2% target, you could miss a great deal of return in your investment portfolio and many that that have fixated on the 2% target in the past six months have lost a significant amount of investment in their portfolios because we haven't gotten to 2%. But we might be achieving price stability, which Alan Greenspan and Paul Volcker defined as a level of price changes or degree of price changes that ceases to have an impact on business and household decision making. And that's where we're moving. And that's why the equity market is feeling better, because we're getting closer to an era of price stability, even if it's not 2%. Tony, behind closed doors, some of the conversations I have with the people I know and I respect, we talk about that 2% inflation target and we try to determine what it would take for the Fed to consider removing that target. Now, I know it's far fetched, but feel that the Fed in this environment can even remotely consider that if inflation stays persistently high, it's highly improbable. Now, they can't walk back on the notion, especially with the inflation rate higher, because then market participants would not would lose their senses as to where the anchor is because it's become ingrained in thinking. But again, as investors, we have to. Take a step back and decide, is the inflation that we're experiencing enough to get in the way of future cash flows for businesses to pay you back at maturity, to pay the interest on your bonds, etc..

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Why a Tight Fed Gives Bond Investors an Opportunity

Tony Crescenzi, executive vice president and market strategist at PIMCO, discusses the fixed income market and why it's a time for bond investors to be "blissful." Tony speaks with Tom Keene and Damian Sassower on Bloomberg Radio. Get more on the Bloomberg Surveillance Podcast: Apple: http://bit.ly/3OPtReI Spotify: http://bit.ly/42xmHPz Anywhere: http://bit.ly/3oOD8ZH (Source: Bloomberg)