Bill Gross Warns Bond Investors Face Record Third Year of Losses

Bond investors’ pain isn’t over yet, even though the Federal Reserve is done raising interest rates, said Bill Gross, the former chief investment officer of Pacific Investment Management Co.

(Bloomberg) — Bond investors’ pain isn’t over yet, even though the Federal Reserve is done raising interest rates, said Bill Gross, the former chief investment officer of Pacific Investment Management Co.

In an investment outlook published Thursday, Gross said bond markets are headed for an unprecedented third year of losses, because of sticky inflation and widening deficits, a result of government fiscal spending he equates with throwing “money out of a helicopter.”

The one-time bond king, who retired from asset management in 2019, urged investors to own less Treasuries and corporate bonds. Instead, he recommends holding more pipeline Master Limited Partnerships. MLPs trade on exchanges, focus on natural resources like oil and gas, and offer higher yields and tax advantages. 

Gross wrote the piece before the Fed’s meeting Wednesday, when officials kept policy rates unchanged while signaling borrowing costs will likely stay higher for longer after one more hike this year.

In response to the Fed’s announcement, Treasuries have extended losses. Ten-year yields approached 4.5% Thursday, reaching a level last seen in 2007. US government debt is down 0.6% this year through Wednesday, after losing a record 12.5% in 2022 and falling 2.3% the previous year, data compiled by Bloomberg show. 

Gross reiterated arguments he made in a recent episode of Bloomberg’s Odd Lots podcast on why 10-year yields may not drop below 4%, even if the Fed cut rates next year.

  • A ballooning government deficit — amounting to about $1.5 trillion in the first 11 months of he fiscal year – is propelling consumer spending and make it difficult to tame inflation.
  • About 30% of the more than $30 trillion Treasuries outstanding will mature in the next 16 months, he said. On top of that, he said, the Fed is selling about $1 trillion of its bond holdings. “Who’s going to buy them at existing yield levels?” he asked.
  • In his view, “the 10 year Treasury is already priced for a 2% inflationary world.”
    • Historically, he said, 10-year notes yield 1.35 percentage points more than the fed funds rate. Even if the policy rate drops to 2.5%, that puts 10-year yields close to 4% “under the best of possible scenarios.”
  • US rates may also be influenced by foreign bond markets, including Japan where yields are still “artificially” low.

 

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