Pimco's Gross: Expect Mild Positive Correlation Between Stocks and Bonds

Thursday, 30 May 2013 10:56 AM

By Dan Weil

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Legendary bond investor Bill Gross, co-chief investment officer of Pimco, says stocks and bonds will head in the same direction going forward.

Given his previous statements, he presumably thinks both stock and bond prices are ultimately headed down.

"The correlation between stocks and bonds up until 2008 — Lehman's [bankruptcy] and [the beginning] of quantitative easing — was a negative one," Gross told CNBC. "When bond prices went down, stock prices went up, at least as a reflection of real growth."

Video:
Economist Predicts 'Unthinkable' for 2013

Since quantitative easing began there hasn't been much correlation, he noted. Some would argue with that, given that stock and bond prices are both near record highs.

In any case, "going forward, there's going to be a mild positive correlation," Gross said. "If bond prices go down, stock prices should go down as well."

"That's simply because the global leveraged trade is dependent on a stable Japanese yen and a stable JGB [Japanese government bond] yield and a stable Treasury yield," he added.

Presumably what he's referring to is the carry trade, in which traders are selling yen for dollars and using the proceeds to buy Treasurys.

Gross believes there is stability in Treasury yields "based upon continued check writing by the Federal Reserve and by the Bank of Japan."

However, he noted, "The bond bull market is over, but yet the bond bear market has not really begun.

With the 10-year Treasury yield hitting a one-year high of 2.23 percent Wednesday, some investors now see attractive value in U.S. government bonds.

"This is an opportunity to put money to work at levels that are 60 to 70 basis points higher than they were a month ago," Thomas di Galoma, senior vice president of fixed-income at ED&F Man Capital Markets, told Bloomberg.

"The perception is the economy will remain on the weak side, and people don't want to chase the equity market."

Video: Economist Predicts 'Unthinkable' for 2013

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