In an exclusive interview with CNBC, former bond bull Bill Gross said strong global growth will hurt long-term bond yields.
“The considerations on a longer basis have to do with strong global growth,” Gross said Friday. “We have recognized in the past few months at Pimco that the world is going to keep on keeping on. Asian growth at close to double-digits in terms of that rate will influence production, yields and inflation on a global basis.”
He stressed that he remains bullish on bonds short-term, but turned bearish on yields three-to-five years out.
“These increases in rates over the past few days have placed the 30-year mortgage market at close to 7% in conventional terms,” said Gross, chief investment officer for Pacific Investment Management Co. and manager of the world's largest bond fund. “This will decimate the housing market if it wasn’t already decimated before, and certainly put the Fed on hold, and maybe allow the Fed to reduce rates…six to nine months from now.”
On Thursday, Gross forecast that benchmark Treasury yields would range higher than previously thought, prompting him to acknowledge he is now a "bear market manager" after a quarter of a century as the global bond market's most powerful bull. His announcement jarred U.S. markets.
Gross said solid global growth and a mild acceleration of inflation in the United States and abroad will drive 10-year U.S. Treasury note yields to top out at 6.5% over the next three to five years as opposed to the 5.5% ceiling previously forecast and 5.1% seen on Thursday.
'Bond-Like' Investment Alternatives
As an alternative to bonds, emerging market currencies offer opportunities that are similar to fixed income investments, Gross said.
"As a bond investor, we tried to look for ways to invest in global growth that were bond-like," he said. "Emerging market currencies do that. We've been invested in the Brazilian real. It's a very attractive economy. They have interest rates at close to 10%, and that's the effective yield you earn when you invest in the Brazilian real. So, that's our favorite currency. Emerging market currencies which exhibit growth of 5% plus are the place to be if you're in a bond world."
Over the next three to five years, Pimco expects the global economy to continue to grow at a pace between 4% and 5% as well as a mild acceleration of inflation, which together are "not necessarily bond-friendly," Gross said.
Not only is the firm trimming duration, or its portfolio's sensitivity to interest rates, to a level that would be less than market indices as opposed to greater than market indices, Pimco is taking advantage of the global growth phenomenon by placing minor positions in emerging-market currencies.