When either Bill Gross or Alan Greenspan speaks, investors take notice. But when the manager of the world’s largest bond fund Pacific Investment Management Co. (PIMCO) and the former chairman of the Federal Reserve are on opposite sides of the fence on their projections for the housing market and the likelihood of whether the central bank will raise or lower rates, Wall Street really sits up straight and pays attention.
In fact, offered Bloomberg, the contrasting opinions of these two highly visible experts, are adding to the biggest volatility in the bond market in two years.
Gross said U.S. housing is in such dangerous shape that the Federal Reserve may need to cut interest rates in six to nine months. In fact, he recently even increased his holdings of cash-equivalent securities to their highest level since February while he waits for the Fed’s next move.
No so, said Greenspan. The odds are 2-to-1 that the economy will avoid a downturn, he stated last month. More recently, he stated that low long-term interest rates may not last.
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Few people in this market have the ability to move the market the way they (Gross and Greenspan) do, observed one investment expert.
The market has to pay attention, he added.
Of course both Gross and Greenspan can’t both be right.
You can’t afford not to take their argument seriously, stated another market expert. Greenspan, after all, has the status of a "supremely successful” central bank governor. Bill Gross has an "amazing” reputation as a "very successful” bond fund manager.
The yield on the benchmark 4 ½ percent note due in May 2017 has already gone up to 5.22 percent from 4.88 percent at the start of June. In addition, the yield has either risen or fallen by 10 basis points or more within the last week.
Before this month, reported Bloomberg, the only time the yield rose or fell by at least that much was on Feb. 27 when the bond mark surged as a rout in global stocks shored up demand for the safest debt.
What Gross and Greenspan actually differ most on is the direction of the real estate market. Housing accounts for about a third of the economy, but after driving the economy since 2001, the residential real estate market has started to slow. Home foreclosures hit a record high in the first quarter. In addition, sales of previously owned homes fell in April to the lowest level in almost four years.
In a June 11 interview, Gross was quoted as having said, "We’re having a housing bust. The Fed may lower six months down the road” as the economy and inflation slow.
Greenspan, in contrast, has said subprime loans are just a small part of the $10.9 trillion in U.S. mortgage loans outstanding.
The prime market is doing reasonably well, he said at a May 17th meeting in Atlanta. Some people are holding off on purchasing homes, he continued. Even so, we are getting a gradual rise in the prime market.
According to news sources, Greenspan predicts the 10-year Treasury note yields will rise as the global savings glut that has held bond yields down recedes.
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