The great bond bull market that began in 1981 is ending with a whimper, fixed income guru Bill Gross said Wednesday.
Every new year on Wall Street brings fresh predictions that bond yields will rise and destroy what has been a reliable source of income for investors. And each year, those predictions are wrong.
However, Gross, who runs the Janus Henderson Global Unconstrained Bond Fund, said 2018 is the year the luck finally runs out. But rather than a coming to close with a massive thud, Gross sees fixed income merely running out of gas due to a number of factors.
He used a coffee analogy to make his point.
"It's not a strong Colombian bear market, it's a decaffeinated bear market, where yields on the 10-year probably rise 10 to 20 to 30 basis points for the year," Gross said during an interview on CNBC's "Power Lunch." "Nevertheless, it means yields are probably moving higher instead of lower."
The latest round of bond bear market calls has become increasingly powerful since the benchmark 10-year note hit what many considered a generational low yield of 1.43 percent on July 11. Most recently, the yield has risen to 2.56 percent, a level not seen since March 2017.
Rising yields mean lower prices, which in turn cut into returns for bond investors looking for capital appreciation. Bond funds hold about $4.5 trillion in investor cash, with the bulk in mutual funds, according to the Investment Company Institute.
Gross said the days of mid-single digit returns for bond investors are likely over.
"I think bonds produce a return of zero to 1 percent," he said. "Is that a bear market? No. But it's a market where investors don't get much of a return."
Gross has been bearish on both stocks and bonds for at least the past six months, and his fund has suffered as a result. Earlier in the day, he told Bloomberg News that the unconstrained fund is short the bond market.
The $2.2 billion fund has returned just 2.2 percent over the past year, placing it in the bottom quarter of Morningstar rankings.
Gross cited three reasons for his bearish bond call: Rising nominal U.S. GDP that will stoke inflation, reduced purchases from global central banks, and higher budget deficits in the U.S.
"The flush of money is being met by a flush of supply, and that produces higher rates," he said, noting that central banks have injected $14 trillion of liquidity into the market over the past five years.
"If we posit that in September or October much of this doesn't go away but it stops increasing, then the pressure for slightly higher yields is probably with us," he said.
The European Central Bank has indicated that its quantitative easing program probably will end this year, and the U.S. Federal Reserve already has begun slowly shrinking the size of its nearly $4.5 trillion balance sheet.
Gross said he expects the Fed to move slowly on rate hikes, with just two likely for 2018.