Don’t Act Surprised By Bill Gross Selling Bonds

Stocks are up today (Dow +20, S&P +3) and bonds are down sharply (10yr Note -53ps, FNMA 30yr 4% coupon -50bps) on continuing inflationary sentiment. Rates rise when bond prices drop in a selloff, and banks are revising rates higher this morning.

Last week Bill Gross, head of PIMCO the world’s largest bond manager, said government bonds look unattractive and he said it again to CNBC this morning. This is contributing to bond selling pressure, and rates rise when bond prices drop in a selloff. This should come as no surprise.

Since QE1 was announced November 24, 2008 and began January 1, 2009, Gross been crystal clear about his strategy of gaming the Fed’s bond buying. Buy what they buy, only do it first. It worked famously for anyone who bought, but now that QE2 is in the home stretch, it’s time to back off … before the Fed does.

This shouldn’t mean an outright rate explosion in the coming months, but consumers holding out for lower rates need to understand this dynamic, as well as the inflation theme.

China hiked rates for the fourth time in seven months this morning ahead of next week’s consumer inflation report expected to show +5.2% inflation.

And last night Bernanke said that the Fed must watch inflation closely, which is a subtle but clear reminder they’ll reverse their extreme low rate stance at any time. And the reversal could be jarring.

Today we’ll see the minutes from the March 15 Fed meeting to see if there’s any fine print discussing inflation concerns. It certainly wasn’t evident in the unanimous vote to keep rates near-zero and press on with QE2.

But we’re in an extremely accommodative rate policy stance, and the Fed will have to tell markets their agenda sooner or later, so if there are no signals in the minutes, we’ll get more at the April 27-27 Fed meeting.

Until then, intraday rate spikes like today’s will continue.