A good (if expected) revision for second quarter GDP growth to 2.5% vs 1.7.  This is a massive change and instinctively makes me think of rigged games.  But, let's take it at face value and think pro-actively.

With a growth rate of 2.5% and inflation at 1.5-2, that argues for long term rates in the 4-4.5% range. Our 30 year is there at the low end.  If we consider that the market expects inflation over the long term, to be around 2.4, then we may extend as high as 5%.

This brings to mind an important distinction to make between bonds and bond funds.  Bond funds (and ETF's) are generally managed to certain characteristics (i.e. TLT long maturity 20+ year US Govt Bonds).  Their holdings do not "roll down".  In other words, the duration/maturity remain somewhat constant.  As such, they are riskier than individual bonds which "roll down" in maturity and, assuming the issuer does not default, pay back the lender.

In Bill Gross's last Insight piece,

http://www.pimco.com/EN/Insights/Pages/Bond-Wars.aspx


he goes through a rather roundabout way of describing different ways to earn bond premium.  What I think is the most important conclusion is that there are multiple ways to earn spread on bonds.  When rates are very low, the maturity premium (extending maturity) is not a great option.  I understand this conclusion but in this last move, it wasn't just maturity that got hammered, it was everything else too - credit, volatility, whatever - if it's was bond related,  it was sold aggressively.

This somewhat indiscriminate selling has left us with some opportunities - in preferreds, munis, loans, corporate bonds, high yield.  And with maturity as well.  I think the curve is a bit steep and the long end represents good "relative" value.  This is a a tricky term, you can be correct making a relative value trade and still lose if you didn't hedge out all of the other risks properly, so I would leave the relative value trades to full time portfolio managers.

I am losing a bit of my zeal for the low interest rate environment not so much from the standpoint of the long end, but eventually, we will be in a situation where the short end is going to become suspect and if that transition doesn't go smoothly (what does?) then we will have a fair amount of volatility to contend with.  Right now, I think finding places to earn spread when there are discounts to NAV in ETF's, is a good place to start because there is an extra bit of cushion if rates do go up further.