The high-yield corporate bond market has gone through "a dramatic earthquake" in the past six weeks because of surging interest rates and that move could impact stocks, Pimco founder and chief investment officer Bill Gross told CNBC on Tuesday.
Gross, whose firm has about $700 billion in assets under management said on "Street Signs" that the fallout could hurt stocks as well.
"We've had a dramatic earthquake of about 8.0 magnitude in the high-yield market in the last six weeks and ultimately equities are going to have to take cognizance of that," said Gross.
Yields in the high-yield market have gone up as much as 200 basis points, or 2 percentage points, over the last six weeks, Gross said. That has him concerned that stock investors have been paying attention to the wrong interest rates.
"Stock investors who use the Fed model and correlate it to Treasury yields should really be using a model that correlates it to corprote yields and high-yield yields." Gross continued, "to the extent that those yields are up 150 basis points - that's comparable to the Fed moving the Fed Funds rate from 5.25% to 6-and-three-quarters or 7%. That's a tremendous push in terms of higher costs and interest."
He said that the rise in high-yielding corporates is also a "tremendous cost for future financings on the private equity side and leverage buyouts and so the stock market, the equity market is going to have to deal with those yields in the index market as opposed to the cash market which is still trailing."