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Double-digit returns?
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July 29, 1997: 9:21 p.m. ET
A conservative investor's dream could become a reality in the bond market
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NEW YORK (CNNfn) - They're not sexy -- but they're not risky -- and now bonds are poised to serve up some double-digit returns.
If economic conditions hold steady, and you sift through the math, total returns of 10 percent to 11 percent -- a conservative investor's dream -- could become reality, according to Bill Gross, founder and managing director of PIMCO, a publicly traded firm that handles bond funds worth almost $100 billion.
So why don't bonds net double-digit gains outright?
"You need a dramatic decline in interest rates in order to produce double-digit types of returns for bonds," Gross said on Tuesday "Moneyline with Lou Dobbs."
Looking at the overall economy, "the market is beginning to believe in 2 percent inflation," Gross said. "We have the long bond close to … 6.4 percent."
The real return on bonds is well over 4 to 4.5 percent -- a historically handsome level.
"So, the lower inflation goes and the more and more investors believe that inflation will stay low, the better it is for the bond market," Gross said.
The finer points of bonds dictate that investors should return the "coupon," a percentage payment the issuer makes, each year to the holder.
"If they return the coupon, which is 6.5 percent plus price appreciation, producing a total return close to 10 percent or 11 percent, [bonds are] still a very attractive return for a conservative type of investor, Gross said.
"For instance, if a long Treasury bond declines from 6.4 percent to 6 percent over the next few months, you'd have price gains of four or five points on top of that 6.5 percent income," he said. "There's your double-digit gain in a more conservative way than stocks provide."
Stocks are more volatile over a longer period of time, because they depend not only on inflation and interest rates, but on earnings as well.
Gross sees that as bad news for shareholders, because earnings are beginning to slow, and the economy is losing steam.
"Therein lies the potential for stocks to return close to bonds at 8 to 9 percent over the next few years," he said.
So what makes Gross think bond yields will drop to 6 percent?
"I think in the next 5 to 6 months you have that possibility as long as investors believe inflation is contained at 2 percent," he said. 
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