Barron's Andrew Bary writes today that it may be time to exit US Treasury market as it has become precariously overpriced in the opinion of PIMCO chief, Mohamed El-Erian.
The bubble in Treasuries looks ready to pop, sending prices on government debt sharply lower. But just about every other corner of the bond market beckons -- and could provide competitive returns with stocks, even if the equity markets have a strong 2009. (Video)
The bear market may have begun Wednesday, when prices of 30-year Treasuries fell 3%. They lost another 3% Friday. - "Get out of Treasuries. They are very, very expensive," Mohamed El-Erian, chief investment officer of Pacific Investment Management Co., warned recently. Pimco runs the country's largest bond fund, Pimco Total Return (ticker: PTTPX). - Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating. Yields on 30-year Treasuries easily could top 4% by year end.
While Treasuries look rich, other parts of the bond market beckon, including municipals, corporate bonds, convertible securities, some mortgage securities and preferred stock. The average junk bond now yields 20%, compared with 9% at the start of 2008.
"The only part of the bond market that you need to be bearish on is Treasuries," says Jim Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "The other sectors are attractively priced."
A bearish stance toward Treasuries and a bullish one toward the rest of the bond market represents the consensus view. Most equity and bond analysts surveyed last month by Barron's projected the Treasury 10-year note would carry a yield of 3% or higher by the end of 2009 ("Out With the Old," Dec. 22). At the same time, it's hard to find bears on corporate bonds. It's nice to be contrary. Sometimes, however, the consensus view is right.
Source: Barrons, Get Out Now!, Andrew Bary, January 5, 2009
http://online.barrons.com/article/SB123094029415750267.html
