Pimco: Three reasons why bond investors have to chill
Bond investors are sweating bullets. In 3½ months, the 10-year yield has risen from about 1.6 percent to over 2.9 percent, before cooling off in recent days. And on Thursday, bond expert Jeffrey Gundlach made the case that the 10-year yield could reach 3.1 percent by end of the year.
(Read more: Gundlach: This market is just 'fear and loathing')
As yields rise, bond prices fall, so the move in yields has been very painful for those who have owned bonds, and investors are heading for the exits. Bond funds saw outflows of $36.5 billion in the first 22 days of August, according to TrimTabs. Bond giant Pimco saw $7.4 billion worth of outflows in July alone, and double that in June.
(Read more: Pimco: Media to blame for huge bond market exodus)
But Tony Crecenzi, Pimco executive vice president, market strategist and portfolio manager, believes that the bearishness has gotten overdone. On CNBC's "Futures Now" on Thursday, he made the case that "yields will move lower from here," and he provided three reasons why.
1: Economic fundamentals don't support these yields
Crescenzi said that yields could rise a bit more due to technical reasons, but the fundamentals don't support it.
After all, "what's priced into the bond market is the idea that the economy, in 2014, will accelerate," Crescenzi said.
But he throws cold water on the rosy economic picture that some are drawing. "Bond investors will begin to reassess whether or not the optimistic forecasts, including the Fed's own forecast, will come true."
Indeed, many have questioned the accuracy of the Federal Reserve's forecast for 3 to 3.5 percent GDP growth in 2014. On Tuesday, Krishna Memani, OppenheimerFunds' chief investment officer of fixed income, said on "Futures Now": "The economic growth that we're looking for in the Fed's forecasts is probably a bit overstated," and for that reason, he, too, sees rates dropping.
2: Inflation is not coming back
While Gundlach compared the recent rise in rates to the rate rally in 1994, Crescenzi said the present situation is markedly different.
"What 1994 was about was the last big battle against inflation expectations," Crescenzi said. "When the economy began to accelerate from the 1991 recession, people started to say, 'Well hey, more growth means more inflation. Why can't the inflation rate get back to 4 and 6 percent again?' Then Alan Greenspan came in and stomped on the bond market with big rate hikes to say there isn't going to be an inflation acceleration like there used to be in the '70s and '80s."
(Read More: For bond investors, it feels a lot like 1994)
Because "that inflation battle has been fought," the Fed doesn't need to hike rates in order to tamp down the rate of economic growth and thus reduce inflation, according to Crescenzi. That means that a full repeat of the 1994 bond catastrophe—in which yields rose nearly 2 percentage points in three months—is unlikely.
3: Investors are misreading the Fed
Crecenzi believes there's an "80 percent chance" that the Fed will begin to taper its qualitative easing program in September. But he thinks investors are misreading when the Fed will raise their Federal funds rate.
Again, because the Fed doesn't need to worry about inflation expectations getting out of hand, Fed Chairman Ben Bernanke has no need to hike short-term rates as Greenspan did. "Unlike 1994, there won't be rate hikes to reinforce the rise in interest rates," Crescenzi said. So according to Crescenzi, "there won't be a rate hike until 2015 and the earliest, and we think 2016."
Any rise in rates would be investor-directed, then—and since the economy will not be as good as investors expect, he does not expect to see rates get pushed higher.
In fact, by the end of the year, this bond guru sees rates falling back to the low to mid 2s on the 10-year.