Bill Gross warns of third consecutive year of bond market losses

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Bill Gross warns of third consecutive year of bond market losses
Credit: © Reuters.

Bill Gross, the former chief investment officer of Pacific Investment Management Co., has reiterated his warning to bond investors about a potential third consecutive year of losses, despite the Federal Reserve's decision to maintain its policy rates. Gross's prediction is largely driven by persistent inflation and expanding deficits, which he likens to "helicopter money" or excessive government fiscal spending.

The ex-asset manager's recent investment outlook noted that 10-year Treasury yields neared 4.5%, a level unseen since 2007. Year-to-date data shows US government debt has decreased by 0.6%, following a record 12.5% loss in 2022 and a 2.3% drop in the preceding year.

Gross maintains that 10-year yields are unlikely to fall below 4%, even with a potential rate cut by the Fed next year. This stance is reinforced by the burgeoning government deficit, which reached approximately $1.5 trillion in the first 11 months of the fiscal year, fueling consumer spending and complicating inflation control.

In light of these challenges, Gross advises investors to reduce their holdings in Treasuries and corporate bonds, suggesting a shift towards pipeline Master Limited Partnerships (MLPs). MLPs, traded on exchanges and primarily dealing with natural resources such as oil and gas, offer attractive yields and tax benefits.

The Federal Reserve's recent decision to keep policy rates unchanged indicates that borrowing costs will likely remain high for an extended period following another planned increase this year. This decision came after Gross's advice was published.

Gross also drew attention to the fact that around 30% of over $30 trillion in outstanding Treasuries will mature within the next 16 months. Additionally, the Fed plans to offload about $1 trillion of its bond holdings. Gross questions who the potential buyers would be at current yield levels.

According to Gross, the 10-year Treasury is already factoring in a 2% inflation rate. Historically, 10-year notes yield 1.35 percentage points more than the fed funds rate. Therefore, even if the policy rate declines to 2.5%, 10-year yields would hover around 4% in the most favorable of scenarios.

Gross also noted that foreign bond markets, such as Japan's with its persistently low yields, could also impact US rates.

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