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Barron's: The 'Great Rotation' Has Begun

By John Morgan   |   Monday, 08 Jul 2013 11:02 AM

The long-awaited "Great Rotation" out of bonds and into stocks is now under way, but potential pitfalls for both asset classes still lie ahead, according to Barron's.

"Because this bond bull market is the biggest ever — prices ran up for decades as the yield on 10-year Treasuries shrank steadily from 16 percent in 1981 to 1.4 percent last year — the process of unwinding it is fraught with risk," the magazine said.

"Even investors who favor stocks over bonds don't want to see an unruly flight, since a bond crash that sends interest rates soaring isn't good for anyone."

Economist Predicts 'Unthinkable' for 2013

Nicholas Colas, chief market strategist at ConvergEx Group, noted fixed-income products have been in a bull market longer than stocks, gold or any other asset class he could name have, according to Barron's.

"At some point the party has to end, and the first half of 2013 feels like the bartender has just called 'last round,'" Colas said.

As for stocks being able to pick up the investment slack from bonds, Barron's noted the macro view is not all rosy — Europe's recessing is worsening, China's growth is tepid and Middle East tensions are on boil, not to mention the fact that corporate profit margins are already high and revenue expansion is weak.

One important positive for stocks is that investor sentiment is not overly optimistic, often a positive contrarian indicator for higher share prices ahead, the magazine noted. A mid-June survey of Charles Schwab customers showed nearly one in five have moved money into cash in recent months, and just 49 percent of those surveyed believe it's the right time to invest in stocks.

In a tale of two bond fund managers, Investment News reported Bill Gross' Pimco Total Return Fund, the world's largest mutual fund, lost 4.7 percent in May, causing a record $9.9 billion in withdrawals last month.

Investment News said the fund's loss was amplified by Gross' large bet on Treasury Inflation-Protected Securities (TIPS), which are doing poorly in the absence of inflationary pressures.

Rival bond fund manager Jeffrey Gundlach's DoubleLine Total Return Bond Fund avoided TIPS and is down only 2.6 percent in the two months through June and down just 0.3 percent for 2013, Investment News said.

Gundlach called TIPS a "disaster" and a "trap."

"Unless inflation goes higher, then all you have with TIPS is interest rate risk, just like every other Treasury."

Goldman Sachs revised its forecast for the 10-year Treasury note yield upward, predicting it will reach 4 percent by 2016 and begin 2014 in a range of 2.75 percent to 3 percent, MarketWatch reported.

Video: Economist Predicts 'Unthinkable' for 2013

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The long-awaited "Great Rotation" out of bonds and into stocks is now under way, but potential pitfalls for both asset classes still lie ahead, according to Barron's.

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