Guru watch

There is “nowhere to go but up” for US Treasury yields, warns Bill Gross, in a note published on his personal website. Gross, who co-founded asset manager Pimco in 1971 and retired from managing money in 2019, was once known as the “bond king”. Most of his career coincided with a long bull market in bonds as interest rates declined relentlessly in the early 1980s (bond yields and prices move inversely to one another).

Gross – who has been bearish on bond prospects for a while – now believes that the yield on ten-year US government debt will rise from its current level of around 1.25%. That might not hurt too much if it happened gradually, but he believes yields will instead jump to 2% within the next 12 months, resulting in losses for bond investors.

Why? Because, Gross says, “it’s more than obvious” that quantitative easing (QE) will “probably end sometime in mid-2022 given inflation at greater than 2% and economic growth prospects remaining optimistic.” The problem is that in the last year, the US Federal Reserve has “absorbed 60% of net issuance” of government debt through QE. If the Fed stops buying, the risk is that US Treasury yields will have to rise to attract other buyers, particularly if government spending remains high.

What does it mean? “Cash has been trash for a long time”, argues Gross, but now “intermediate to long-term bond funds” should be added to the “trash receptacle”. As for stocks, “earnings growth had better be double-digit-plus or else they could join the garbage truck.”