We are hearing very divergent opinions on the bond market from the biggest gurus in the industry. In one corner we have Jeffrey Gundlach saying that bullish long-term Treasury trades are about to be unwound, which will drive prices down and yields up. Already we’re seeing the long-end of the curve rising higher, with yields on the 30 year Treasury up to 2.92% after months of net long positions building up momentum. That has driven the yield past its 50-day and 200-day moving averages, which Gundlach says could drive further selling and bring the yields up to 2.97%, or the 100-day moving average. Breaching that point could drive even more investors to sell, resulting in a vicious circle that encourages more offloading of U.S. Treasuries.
Janus’s Bill Gross, the bond legend who built Pimco, disagrees. He dismissed the recent selloff in U.S. Treasuries, noting that prices would need to decline by 2-3 points per week on double or triple current volatility for us to be in a bound rout. According to Gross, Treasury yields will rise higher, but he seems to believe the selloff will be much more orderly than Gundlach’s more dire warnings.
There’s no way to know who’s right until we reach the end of the year, but one thing is clear: investors now have the option to invest with the manager they think is right by either buying DoubleLine’s bond funds or Janus’s unconstrained fund, which Gross himself personally manages.
The disagreement highlights one of the more interesting points about the nature of finance; unlike many other social sciences, in which many work together to create a broad agreement that in turn pushes human knowledge forward, finance very often is more about knowledgable experts disagreeing on a phenomenon and then betting on who is right. No one is right all the time—Gross’s infamous error about U.S. Treasury yields during the QE years at the start of this decade are partly why he’s no longer with Pimco—but the goal of finance is to be right 51% or more of the time—that is, being better than flipping a coin.
If that sounds easy, it isn’t. Unemployment lines are littered with traders, analysts, and bankers who confidently believed they could be right more than half of the time but simply couldn’t do it.
And there isn’t even broad agreement in the industry about how to be right more than half of the time. To wit, many funds employ “generalists” while others employ “specialists”. Generalists are the CFA-types who have a very deep and pronounced knowledge of the intricacies of finance theory, a smattering awareness of economic principles, and a good foundation of accounting principles and business regulations. Specialists may be weaker in finance theory (although they aren’t always) because they spend a lot more time gaining in-depth knowledge about a particular industry or sector to uncover emerging trends that others cannot understand or discover because they don’t understand the industry well enough.
Specialists thrive in growth sectors. While a finance expert scoffed at Facebook’s (FB) 100+ P/E ratio in 2012-2013, the specialists who understood Facebook, the internet, and advertising well enough recognized a deal and bought aggressively. Similar errors in 2014 resulted in finance experts seeing strength in energy firms’ balance sheets—only to see their funds shrink rapidly during the oil rout at the end of the year that energy experts could have predicted thanks to their knowledge of the industry.
When it comes to bonds, however, there’s no specialist knowledge that can help too much. In some cases it can, but in many it’s quite irrelevant. Thus a financier or aspiring financier needs to identify early on their particular expertise and niche—are they good at harnessing finance principles to uncover market inefficiencies or are they good at drilling deep into less finance-oriented trends in a particular sector? Answering that question is the first step to being an expert analyst or a bond guru.