Just, let him finish.

I’m going to one-up Mark Twain in the quantity department and spin two yarns about jumping frogs, one which has been frequently told, the other not so much. Neither of them have anything to do with Samuel Clemens’ heralded short story, but both, metaphorically at least, describe our current investment markets and how to think about the future. My first story is the one you’ve all heard about. Put a frog in a kettle of boiling water and he’ll jump out faster and further than any of those blue ribbon winners at the Calaveras County jumping frog contest. Put him in a pot at room temperature, however, slowly turn up the temperature to boiling, and you’ll have frog legs for dinner. This latter, more unfortunate toad temporarily adapted to his external environment, which seemed like a practical thing to do, until – well, until he reached 212° at which point he was cooked. Today’s bond investors are experiencing a similar fate with nary a “ribbet” of complaint.


All right fellow frogs, so we’re being repressed and shortchanged in order to allow Uncle Sam to balance its books. Whatta we gonna do about it? “Frogs of the world unite,” as Lenin might have said, and so here’s where I harken back to Mark Twain and my second lesser-told frog story. There was this other frog who instead of being tossed into a pot of hot water was left to cool its heels in a pitcher of cold milk. Unable to jump out, he churned and churned those frog legs until eventually the milk turned into butter and the hardened butter allowed him the platform to leap to froggy freedom! Well, let’s get churnin’, fellow frogs. If the U.S. or the U.K. or any other government is going to attempt to boil us alive, let’s make butter! Butter in this instance is what PIMCO characterizes as “cheap bonds.” Potentially confusing, “cheap bonds” is really a simple concept – sort of like the teeter-totter. Any bond, even a Treasury bond, is composed of several pieces – sort of like an atom with its neutrons, electrons, protons, positrons, neutrinos (whoops, don’t wanna go too far here). There’s an interest rate or yield piece, commonly measured by “duration.” There’s a credit piece, typically referred to as a “spread” when you buy a corporate bond. And there’s a volatility piece, a liquidity piece and other little bits and particles that will go unexplained for now. The important point, though, is that if the government is going to artificially repress yield, then an intelligent frog should focus on the parts of a bond that are less repressed! You can, for instance, produce a 1% expected return in today’s market in a number of ways. Buy a repressed 3-year Treasury note at just under 1%, or purchase an A-rated corporate floating rate note (FRN) with little to no durational risk at a 3-month LIBOR +75 basis points spread, currently returning 1%. Which is the better deal? Well, they both appear to lead you to the same place but our cheap bonds argument would maintain that the FRN gets you there with a lot less risk. The credit piece, in other words, is a safer spread than the duration piece.

Journalists, financial advisors, and perhaps even some clients marvel at how PIMCO can be doing so well in 2011 while being underweight the Treasury/durational component of the bond market. Folks – we’re making butter. If you’re being repressed, our strategy is to churn those legs, get out of the pitcher, and above all stay away from boiling pots of water.

Buy Cheap Bonds With Safe Spread [PIMCO]

30 comments (hidden to protect delicate sensibilities)
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Comments (30)

  1. Posted by Billy Gross | June 1, 2011 at 3:07 PM

    I’m a huge fan of my work.

  2. Posted by Guest | June 1, 2011 at 3:10 PM

    Frog legs are ok to eat at 160 degrees.

     – South Florida Raymond James Associate

  3. Posted by Anonymous | June 1, 2011 at 3:12 PM

    Getting hooked on Mega-desk was my own damn fault. But, I don’t care about assigning blame. All I care about, is Mega-desk. That is all I care about. Getting. More. Mega-desk.

  4. Posted by Guest | June 1, 2011 at 3:19 PM

    who boils frog legs?  we fry them.

    -Thomas Keller

  5. Posted by Put_Option | June 1, 2011 at 3:22 PM

    “There’s a credit piece, typically referred to as a “spread” when you buy
    a corporate bond. And there’s a volatility piece, a liquidity piece and
    other little bits and particles that will go unexplained for now.”

    Oh that makes a lot more sense now

    -AIG Credit Risk Manager

  6. Posted by Charlie Dahmer | June 1, 2011 at 3:22 PM


  7. Posted by Homer S. | June 1, 2011 at 3:33 PM

    Hmmmmm.  Frog Butter.

  8. Posted by When's Lunch? | June 1, 2011 at 3:35 PM

    These little screeds of Bill’s are easier to parse if you dream of a sheer, pink-veiled El-Erian twirling and dancing to the sound of his own humming and finger cymbols gently showering rain-like sounds. 

  9. Posted by Richard | June 1, 2011 at 3:39 PM

    They are working on it, just go search: Layoffs 2011
    You will see we are boiling.

  10. Posted by What Not To Wear | June 1, 2011 at 3:41 PM

    Note to “The Bond King”:  You have more than established your place at the top of the finacial world, but I gotta tell ya, that “tie-scarf” look has got to go!  You are not a manly-man.  When you loop that tie around your neck, you do not look like a jock cooling down from a workout.  You look like an effeminate nerd wearing a boa.

  11. Posted by Momentus | June 1, 2011 at 3:52 PM

    Will there be a frog-leg question on the CFA exam this Saturday?

    –guy who wishes he poured this much studying into the GMAT

  12. Posted by Guest | June 1, 2011 at 3:58 PM


  13. Posted by George Hamilton | June 1, 2011 at 4:19 PM

    How about getting some sun?  For God’s sake, you live in Southern California!

  14. Posted by What Not To Wear | June 1, 2011 at 4:29 PM

    Nothing more.  I’m not reading a bedtime story.

  15. Posted by F Abagnale_Sr | June 1, 2011 at 4:41 PM

    This prick plagarized my story.

  16. Posted by That second mouse | June 1, 2011 at 4:50 PM

    Journalist: Bill, would you like to say grace? [Long pause] Journalist: Unless you’re not comfortable.
    Bill Gross: Absolutely. Two little mice fell into a bucket of cream. The first mouse quickly gave up and drowned, but the second mouse, he struggled so hard that he eventually churned that cream into butter and he walked out. Amen. [All say: Amen]
    Client: Oh, that was beautiful. The mouse, he churned that cream into butter.

  17. Posted by trojan | June 1, 2011 at 4:57 PM

    Hey, I’ll tell you what. You can get a good look at a butcher’s ass by sticking your head up there. But, wouldn’t you rather to take his word for it?

  18. Posted by Guest | June 1, 2011 at 5:00 PM

    What if the frog is in skim milk?

  19. Posted by Anonymous | June 1, 2011 at 6:13 PM

    We are slightly offended

  20. Posted by carl | June 1, 2011 at 7:29 PM

    Wait.. Bill.. youre not a lutheran? 

  21. Posted by carl | June 1, 2011 at 7:29 PM

    Wait.. Bill.. youre not a lutheran? 

  22. Posted by carl | June 1, 2011 at 7:29 PM

    Wait.. Bill.. youre not a lutheran? 

  23. Posted by florida | June 2, 2011 at 3:30 PM

    and cowbell.  always more cowbell

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