Bill Gross, the one-time bond king who co-founded fixed income giant Pimco, is now comparing his long-favored asset class to garbage. The 77-year-old investor believes bond yields are poised to shoot up as the Federal Reserve begins tapering the massive monetary stimulus that supported the economy throughout the pandemic. Bond prices fall as rates rise, eroding the asset's value so significantly that it would be as useless as cash, Gross said. "Cash has been trash for a long time but there are now new contenders for the investment garbage can," Gross wrote in a blog posted on his website Thursday. "Intermediate to long-term bond funds are in that trash receptacle for sure, but will stocks follow? Earnings growth had better be double-digit-plus or else they could join the garbage truck." Gross predicted the 10-year Treasury yield will trade around 2% for the next 12 months, which will equate to a 4% to 5% price loss and a negative total return of 2.5% to 3%. "At 1.25% for the 10-year Treasury, they have nowhere to go but up," Gross said. "With quantitative easing about to reverse, it's more than obvious that the $120 billion-a-month Federal Reserve deluge will probably end sometime in mid-2022 given inflation at greater than 2% and economic growth prospects remaining optimistic." The 10-year Treasury yield hit an all-time low of 0.318% in March 2020 amid a historic flight to safety. Yields had stayed low for a number of months after the central bank conducted an emergency rate cut to near zero to rescue the economy from the Covid-19 crisis. Now, bond yields have rebounded on the back of the economic reopening, and many expect the pace of the ascend to accelerate when the Fed taper begins. "How quickly is the real question because even if they go up by 10 basis points a year over the next decade, a bond investor could still break even with an indexed bond fund. But they'll go up quicker than that and probably much quicker," Gross wrote.
Jim Young | Reuters
Bill Gross, the one-time bond king who co-founded fixed income giant Pimco, is now comparing his long-favored asset class to garbage.