Jeremy Grantham: Even a Slight Recovery Dooms Bonds

Tuesday, 14 Feb 2012 07:55 AM

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Add Boston asset manager Jeremy Grantham to the chorus of heavyweights — among them Warren Buffett and Pimco bond guru Bill Gross — who are down on U.S. debt.

Despite an outperformance yet again in recent months, the clock really is ticking on bond prices, says Grantham, co-founder and chief investment strategist at GMO. As yields fall, bond prices rise. The 10-year Treasury has a coupon of 2 percent and the 30-year is at 3.125 percent.

"We are literally running out of superlatives to describe how much we hate bonds," GMO says in its latest note to clients.
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"Yields are pitiful, dangers of even a slight recovery that could wreak havoc for long-duration portfolios loom, and monetary policies globally certainly have added to the specter of rising yields."

GMO prefers stocks, despite the recent run-up in the indexes.

"High quality stocks still trade at attractive levels, and the general defensive posture of quality still remains appealing given all of the uncertainties surrounding global prospects, dysfunctional governments, and horrific bond yields," the letter continued.

Buffett, in an adapted version his annual letter to shareholders published online by Forbes, repeated his view that bonds currently are “among the most dangerous of assets.”

“Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as these holders continued to receive timely payments of interest and principal,” Buffett wrote.

He continued: “Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.”

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