Bill Gross, the former co-founder of Pacific Investment Management Co. (Pimco) and one of the most influential bond investors in history, has issued a scathing critique of the 10-year Treasury market, calling it “overvalued” and “trash”.
In an interview with Bloomberg Television on Thursday, Gross said that the current yield of around 4.16% on the benchmark 10-year note is too low, and that a fair yield would be closer to 4.5%. He argued that the Federal Reserve’s massive bond-buying program, which has been absorbing about 60% of net Treasury issuances, has distorted the market and created a bubble.
Gross also pointed out that the demand for Treasuries from foreign central banks and investors has been declining, while the supply of Treasuries from the US government has been increasing due to large fiscal deficits. He questioned how willing the private markets will be to absorb the excess supply once the Fed starts tapering its asset purchases, which could happen as soon as next year.
“How many more fiscal spending programs can we afford without paying for it with higher interest rates?” Gross asked.
Gross predicts a ‘tantrum’ in the bond market
Gross’s bearish view on Treasuries echoes his previous warnings about the bond market. In March, he told Bloomberg TV that he had started betting against Treasuries when the 10-year yield was around 1.25%. Since then, the yield has risen to as high as 4.4% in July, before retreating slightly in August.
Gross said that he expects the 10-year yield to reach 2% over the next 12 months, implying a loss of about 3% for bond investors. He also said that stocks could join the “trash” category if earnings growth fails to meet expectations.
“Cash has been trash for a long time, but there are now new contenders,” Gross wrote in a blog post on his website. “Intermediate to long-term bond funds are in that trash receptacle for sure, but will stocks follow? Earnings growth had better be double-digit-plus or else they could join the garbage truck.”
Gross compared the current situation to the “taper tantrum” of 2013, when the Fed’s hint of reducing its bond purchases triggered a sharp sell-off in Treasuries and other fixed-income assets. He said that if inflation returns to the Fed’s 2% target by next year, a similar tantrum could be avoided, but he remained skeptical.
“I doubt it,” he wrote. “The Fed is too dovish; inflation too embedded; fiscal spending too excessive.”
Gross’s legacy and controversies
Gross is widely regarded as one of the most successful bond managers of all time, having built Pimco into a $2 trillion powerhouse and earning the nickname of “bond king”. He left Pimco in 2014 amid a bitter feud with his former colleagues, and joined Janus Henderson Investors, where he managed a much smaller fund until his retirement in 2019.
Gross has also been involved in several legal disputes and personal scandals in recent years. In 2017, he settled a lawsuit with Pimco for $81 million, after accusing the firm of forcing him out and depriving him of hundreds of millions of dollars in compensation. In 2020, he was sued by his neighbor for allegedly harassing him with loud music and obscene gestures over a dispute involving a sculpture in his yard. The case is still pending.
Gross, who is worth an estimated $1.5 billion according to Forbes, has been donating most of his fortune to various charitable causes, including education, health care, and animal welfare. He has also been vocal about his views on politics, economics, and social issues, often expressing them in his colorful and eccentric investment outlooks.
