Bill Gross is a legendary bond investor who co-founded Pacific Investment Management Co. (PIMCO), one of the world’s largest asset managers. He retired from the industry in 2019, but he still shares his views on the bond market from time to time.
In a recent interview on Bloomberg Television, Gross said that he thinks 10-year Treasury notes are “overvalued” at current levels. He said that a fair yield for the 10-year note would be around 4.5%, much higher than the 4.16% it was trading at on Friday.
What are the reasons behind his opinion?
Gross gave several reasons for his bearish outlook on 10-year Treasuries. He said that inflation may prove sticky at around 3%, which would erode the real value of bond returns. He also pointed out that historically, 10-year yields have traded about 135 basis points above the Federal Reserve’s policy rate. So even if the Fed lowers interest rates to about 3%, the current 10-year yield remains too low, given the historical relationship.
Gross also said that he expects the Fed to taper its bond purchases soon, which would reduce the demand for Treasuries and put upward pressure on yields. He said that the Fed may have to act faster than expected to curb inflation and prevent a repeat of the 1970s stagflation.
How are other market participants reacting to his view?
Gross is not alone in his pessimism about 10-year Treasuries. Many analysts and investors have been warning that bond yields are too low to reflect the economic recovery and the inflation risks. Some have even predicted that the 10-year yield could reach 5% or higher by the end of the year.
However, not everyone agrees with Gross’s assessment. Some argue that inflation is transitory and will subside once the supply chain disruptions and labor shortages ease. They also point out that there is still strong demand for safe-haven assets like Treasuries, especially from foreign buyers who face even lower yields in their home markets.
Moreover, some suggest that Gross may have a personal bias against Treasuries, as he has been shorting them for a long time and has suffered losses as a result. They question his credibility and accuracy, given his track record of making wrong calls in the past.
What are the implications of his view for investors?
If Gross is right and 10-year Treasuries are indeed overvalued, then investors who hold them may face significant losses as yields rise and prices fall. Conversely, investors who bet against Treasuries may profit from their decline.
However, if Gross is wrong and 10-year Treasuries are fairly valued or undervalued, then investors who hold them may enjoy steady income and capital appreciation as yields fall and prices rise. On the other hand, investors who bet against Treasuries may incur losses as their positions go against them.
Therefore, investors should be careful and prudent when making decisions about their bond portfolios, as they may face considerable risks and uncertainties in either direction.
