I have become a loyal reader of Bill Gross's monthly Investment Outlook. This January issue is somewhat mind-boggling. It mainly talked about four observations of the current fixed income market and is best concluded in this paragraph: "That history points towards an environment of lower than expected real rates of interest, low total returns for bonds (a 4% total return future world), an apparently overvalued corporate sector, and intermediate maturity bonds that should perform equally with long bonds at half the volatility."

Bill Gross cited a number of historic research to back up the story and here is a recap:

1. Expect lower real rates of interest

2. Expect low total return for bonds

The real interest rate is 0.4% in US in the first 80 years in the 20th century and 2.8% since 1980. This is also true for all major western countries. This means "bonds (and stocks too) will be low return asset classes for the foreseeable future."

3. Corporate bonds are overvalued

AAA/AA corporates outperforms treasuries over time by 53 basis points a year, and since the annual default premium is 48 basis points (to take care of corporate bankruptcy), in order to get the 53 basis points spread the spread should be 101 basis points. The current treasury/corporates spread is on 30-35 basis points so "the odds of successfully outperforming Treasuries are substantially reduced."

4. Immediate maturity bonds can achieve same return with half volatility compared to long-term bonds

In the last 75 years, 5-year bonds produced the same return compared to long bonds with half volatility. "Long bonds are the loser in this historical and presumed future bond market environment."