Recapping the day's news and newsmakers through the lens of CNBC.
Bill Gross's last stand?
Everyone knows higher interest rates are coming; no one knows exactly when.
And that uncertainty, based on confusion about the Federal Reserve's tapering plans, has added some fear to bond investing. Always eager to make the case for bonds—and in the aftermath of a major exodus of assets from his bond giant's funds—Pimco chief Bill Gross invoked war metaphors in his latest letter to clients.
As most savvy investors know, when interest rates rise, prices of older bonds fall. After all, who'd pay full price for an old bond yielding 3 percent if a new one paid more? At some point, investors' expectations about higher yields in the future are baked into current prices. But when expectations prove premature or wrong, prices have to adjust, making for the kind of drama we are seeing play out in the bond markets. Investors have pulled tens of billions out of bond funds, but that's just a drop in the bucket, and a bigger exodus could be very disruptive, hammering bond prices.
Amid all this commotion, Gross has a simple view of the bottom line: he says investors should prepare for a world of lower bond returns. So why own bonds at all in this environment? Gross says bonds still offer diversity, and Pimco still has some tricks up its sleeve to make bond investing work. Investors can still make more with bonds than with cash, and if they assume yield is all they'll earn, and they are not speculating on prices, bonds entail less risk than stocks.
Appearing late in the day on CNBC, Gross toned down his rhetoric and said the war he was referring to might not be on the scale of World War II.
"Bonds have suffered a near Somme-like defeat in the past few months...We have spent months—indeed years—preparing for this new dawn. We intend for you—our clients—to be surviving veterans of this battle, not casualties."
"It's not like the Cuban missile crisis or a nuclear war. It's more like Grenada in terms of what we've gone through."
—Gross, referring to the U.S.-led invasion of the tiny Caribbean island nation in 1983, which resulted in a U.S. victory within a matter of weeks.
"Every time the Fed has enabled a liquidity-fueled surge in asset prices, eventually you had a great unwind. ...That could be very disruptive to both interest rates and credit spreads."
—Jurrien Timmer, Fidelity's director of global macro