If You're Investing in Bonds, Bill Gross Has a Message For You

Start the conversation

Leave a Reply Click here to cancel reply.

You must be logged in to post a comment.

If you're investing in bonds, Bill Gross just delivered you a serious warning.

Gross wrote in his February newsletter that the factors that contributed to last month's 1% loss for U.S. Treasuries - the biggest since March 2012 - aren't going away any time soon.

Total debt, which includes corporate, government and household, has expanded from $3 trillion in the 1970s to about $56 trillion today, explained Gross. He said that's left bond yields in the 1% - 2% range, instead of the historic level of 3% - 4%.

Gross said the staggering amount of debt in the United States has created a "credit supernova" that could crush the bond market as the global credit bubble "is running out of energy and time."

"Our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic," Gross wrote.

Gross warned that anyone investing in U.S. government bonds should evaluate their exposure.

And he isn't alone. Jim Rogers and Goldman Sachs have both been bearish on bonds.

"I'm short long-term government bonds," Rogers said Feb. 6 on Bloomberg Radio. "I plan to short more. That bull market, that's a bubble."

So what should bond investors who want yield do with their money?

Investing in Bonds: Go Global

Investors who want yield without high risk in the bond market should consider emerging market corporate bonds.

Some U.S. investors have avoided emerging markets corporate debt, thinking the market is small and illiquid.

But as Gross' bond firm PIMCO has pointed out, that's not the case.

"The dollar-denominated EM corporate market has been growing steadily, and many corporates can offer higher yields and lower durations than sovereigns," the bond house said in a research note in 2012. In fact, "the stock of EM corporate bonds outstanding has grown to around $1 trillion, dwarfing that of EM sovereigns at $680 billion," according to PIMCO.

Emerging markets firms have issued an average of $200 billion per year in corporate debt since 2010. For those that need a little more reassurance, consider the following:

"Since 2003, EM U.S. dollar-denominated corporate bond issuance has outpaced sovereign issuance in a trend we believe will make EM corporate debt an increasingly larger allocation to emerging market fixed income," exchange-traded fund (ETF) issuer WisdomTree said.

Also, emerging markets corporate debt can jump in value in stunning fashion. For example, PIMCO points out that $1 invested in Russian corporate debt in 2008 would be worth more than $2 today.

How to Invest in Foreign Corporate Bonds

Until recently, accessing emerging markets corporate bonds was difficult for individual investors.

Fortunately, ETF issuers, ever the purveyors of niche products, changed that with a spate of new product launches devoted exclusively to corporate debt issued by companies in the developing world.

WisdomTree is the sponsor of the WisdomTree Emerging Markets Corporate Bond Fund (Nasdaq: EMCB), the first ETF to track corporate debt from developing nations.

EMCB debuted in March and by the end of 2012 had $87 million in assets under management, making it one of the more successful new ETF launches of 2012.

If you want more information to validate the emerging markets corporate bond investment thesis at large, then consider this: the concept behind EMCB proved so successful right off the bat that not one, but two copycat ETFs have since come to market.

EMCB offers a 30-day SEC yield of 3.74% and an embedded income yield of 4.42%. And its credit risk is fairly low. Roughly 73% of the fund's holdings carry investment grade ratings. Of the remainder, only a scant 2.4% are rated below B and plenty are knocking on the door of investment-grade ratings.

EMCB's holdings are also dollar-denominated, meaning investors will not be exposed to wild swings in emerging markets currencies.

What makes the fund all the more alluring is its management style. Not only do the portfolio managers consider macroeconomic factors, company-specific credit factors are also considered.

Of course, capital appreciation cannot be ignored. Since inception, EMCB has returned nearly 9.2%. Obviously, that performance has been driven by the returns of its holdings.