Update on PIMCO's January 2006 Investment Outlook -- and my comments

Okay, I glanced at it... Here's my initial reaction...

PIMCO's "Bond King" Bill Gross has just posted his latest January 2006 Investment Outlook (IO), entitled "A Gift That Should Keep on Giving." I need to read it again to try to pick up any nuances, but his basis message is that "yields have peaked in the bond market and will soon peak in Fed Funds producing an economic slowdown in 2006. If the Fed goes beyond 4½% and inverts the yield curve, the possibility of recession will increase."

My comments...

Mr. Gross makes some esoteric arguments, but it's not clear if they are all really necessarily the key factors driving finance, the economy, and the Fed at this time. He's not actually telling us where he thinks the Fed will stop. That sounds like he concedes that he doesn't have a clue.

After reviewing all available information, my forecast remains that the Fed will hike the fed funds target interest rate to 5.00% in May. No recession will follow.

I suspect that the Treasury yield curve will drift upwards in the coming months, but these days it's driven by short-term supply and demand and not hard-core fundamentals about short/long yield spreads. So, we could see some significant inversion for pieces of the yield curve, but not the full yield curve, as Treasury supply and demand ebb and flow, but any inversion won't be persistent enough to be the kind of reliable recession or slow-down indicator that Mr. Gross seems to be depending on.

And for icing on this cake, the issuance of new 30-year Treasury "long" bonds in February will totally mess up any short-term notion of meaningful significance of the Treasury yield curve. The 10-year T-note yield is going to be flopping around like a flag in a moderate breeze.

You do enjoy volatility, don't you?

-- Jack Krupansky