Bill Gross lashes out at ‘garbage’ government bonds

Bonds are “trash” and buying US government debt is all but certain to be a losing bet, legendary former bond investor Bill Gross has said.

Gross, the erstwhile “bond king” who built Pimco into a $2tn asset manager before his departure in 2014, fired the latest salvo against the asset class that made him famous in a rambling investment outlook posted on his personal website.

US Treasury yields have slumped in recent months, reflecting a powerful global rally in global debt prices that has blindsided many big investors. On Thursday the 10-year Treasury yield — a benchmark for financial assets around the world — was just 1.29 per cent, far below its late-March peak of 1.75 per cent.

At today’s levels, yields have “nowhere to go but up” given the Federal Reserve is soon expected to start winding down its bond-buying programme, wrote Gross. The 77-year-old, who retired from professional fund management two years ago, said he expected the 10-year Treasury yield to rise to 2 per cent over the next 12 months, resulting in a loss of about 3 per cent for investors as bond prices fall.

“With quantitative easing about to reverse, it’s more than obvious that the $120bn-a-month Federal Reserve deluge will probably end sometime in mid-2022 given inflation at greater than 2 per cent and economic growth prospects remaining optimistic,” he wrote, adding that the central bank has bought 60 per cent of net issuance by the US government over the past year. “How willing, therefore, will private markets be to absorb this future 60 per cent in mid-2022 and beyond?”

He added: “Cash has been trash for a long time but there are now new contenders for the investment garbage can. Intermediate to long-term bond funds are in that trash receptacle for sure.”

After founding Pimco in 1971, Gross revolutionised bond investing as he built the company into the world’s largest fixed-income asset manager. He later became known for his wide-ranging, often eccentric commentaries on markets. His latest missive is no exception, touching on non-fungible tokens, the gymnast Simone Biles and a 2018 “dust-up” with a neighbour in which he blasted the theme tune from Gilligan’s Island over the fence of his California beachside mansion.

This week’s note is not the first time Gross has attempted to call time on the four-decade bull market in bonds. In March he said he was shorting Treasuries, expecting yields to climb to 3 per cent. He also revealed he was betting against government bonds in early 2018 while working for Janus Henderson, the company he joined after abruptly quitting Pimco in 2014.

Still, Gross is far from the only investor to be caught out by this summer’s Treasury rally. Many heavyweight bond investors stuck with their bearish bets even as yields plunged in July, a move which led to big losses for some high-profile hedge funds that had piled into the so-called reflation trade.