Gross: Bond investors take note: with current QE at 100 billion per month, any bonds worth < par are future road kill.

….click on the video or HERE to watch

Bonds generally are issued at par, or face value. But there’s a popular category of discount bonds called zero-coupon bonds, which are issued below face value and don’t make regular interest payments. They’ve had a turbulent 12 months as the Fed extended its quantitative easing program but gave a more precise sense of when it could end. Pimco’s own exchange-traded fund, the Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF ZROZ -1.11%, returned 60% in 2011 but ended 2012 with a 1% return. Zero coupon bonds are more sensitive to interest rate changes than other bonds.

Gross, manager of the Total Return Fund  PTTRX -0.09%, the world’s largest bond fund, in early January warned that the monetary easing actions of the Federal Reserve, European Central Bank and Bank of Japan were lining the lairs of “inflationary dragons” that will turn bond values to ash. Those worries got fresh fodder on Tuesday when the Bank of Japan said it will adopt an open-ended asset purchase program to stimulate the economy. Read more on the Bank of Japan.

Gross’ alarm over discount bonds may be an extension of that notion, that the massive amount of monetary stimulus dumped into the global financial system will lead to inflation and a bond selloff. It stands to reason that higher premium bonds will do better than discount, or sub-par, ones.

The Fed for its part is in the market on Tuesday buying bonds, in this case Treasury Inflation Protected Securities, as part of its QE efforts. See New York Fed’s Open Market schedule. There’s plenty of potential carnage for those who are looking.

– Laura Mandaro

In this series, I am attempting to describe the fundamental relationship between yields and inflation.

In the previous articles in this series, I said I would attempt to show that the real price of primary commodities (e.g., grains, metals, oil), but especially industrial commodities, were highly correlated with equity yields, and that this was likely the source of Gibson’s Paradox.

Reliable equity data for the U.S. goes back to at least the 1870s, and is easily accessible from Robert Shiller’s website. And although one always wants more data, there is a fair amount of historical commodity data from such sites as the St Louis Fed, the World Bank, the Global Price and Income History Group (GPIH), the International Institute of Social History (IISH), MeasuringWorth, the BLS, Long-Term Returns and other sites.

……read much more HERE

Are T-Bond futures breaking down?  It’s important that we get it right, since, if they are and market forces are about to lay bare the biggest financial shell game in history, we want to be watching from the sidelines when the inevitable panic erupts.  From a technical standpoint, the key number to watch is 143^29, a “Hidden Pivot” derived from our proprietary runes. If this support were to fail we would infer that the selloff had significantly further to go, presumably to at least 141^09, before bulls would have a chance of reversing the tide. By then, however, it could be too late to calm the herd. Interest rates on the long bond would be up by about 25 basis points, to around 3.25 percent, and although that would still be shy of the 3.50 peak recorded last spring, it could suffice to unsettle equity markets and squash a a delicate uptick in real estate that has relied on massive infusions of credit created out of thin air by the Federal Reserve. At the very least, it would give pause to share buyers who have so far gotten 2013 off to a rousing start.

[Click here for a free trial subscription to Rick’s Picks that includes access to a 24/7 chat room and ‘Harry’s Place’.]

What is the correct policy response to a prospective asset bubble? This question has been the focus of considerable academic research, especially since the financial crisis of 2008. Recent communication from the Bank of Canada (BoC) suggests it is considering hiking policy rates in response to the recent surge in household debt and home prices.

…..read more HERE