http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2006/IO+April+2006.htmIn fancy language, Bill Gross says that current bond indexes do not pay an investor for risk. "Bond and asset managers alike (and PIMCO fits both descriptions) are faced with global real interest rate valuations capped at 2% in major markets, and yield spreads almost everywhere that suggest maximum future bond returns of 5-6%. Equity prospects are not much better except in high growth export dominated economies. Commodities and real estate of course are legitimate growth and inflation sensitive asset classes, and due to higher risk and in the case of commodities, growth of the BRICs, these assets will logically provide higher returns over the long term....That leaves the U.S. with its increasingly hollowed out manufacturing core as the near certain loser in currency valuations going forward. To be blunt, the dollar must go down as it loses its carry."Gross' main points:1. Bonds are overvalued, across the board. Risk premia on all bonds are too low. Gross agrees with Greenspan, that this will end badly (that is, with higher interest rates, and lower bond prices). Gross thinks that it is riskier to try to index (because he expects a widespread collapse) than to concentrate in safer areas.2. The dollar is overvalued.3. Gross recommends the following assets: --cash and "near cash" assets, such as eurodollar tranches that mature in 2007-2008. -- Commodities-- alternatives to the dollarThe 5-year TIPS is now yielding about 2%. If a giant, like Gross, can't do any better than that, it is starting to look good.Wendy
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