Bond Investors Should Revolt: PIMCO's Gross

The Co-CEO of bond giant PIMCO, Bill Gross, has warned investors that holding US Treasurys is an “abdication of responsibility” in his May note to investors.

“US Treasurys and the bond market in general are being 'repressed', 'capped' or simply overvalued compared to the prior 30 years,” Gross wrote.

With the Federal Reserve's policy keeping yields low, Gross believes investors are being short-changed and that yields would be higher without the Fed’s unconventional measures.

“Bond investors forced to invest in dollar government bonds either through indexation, convention, regulatory guidelines or simply falling asleep at the helm are being short changed by one to two percent annually compared to historical norms and in many cases receive negative real yields,” he wrote.

“While that still leaves open the question of price behavior following QEII, there should be little doubt that simply holding Treasurys at these yield levels for an extended period of time represents an abdication of responsibility,” said Gross.

QEII is an abbreviation for the Fed's second round of quantitative easing, a policy of buying assets in order to inject money in markets and thus keep interest rates low.

“Bond – and stock – investors have been sailing on the 'Good Ship Lollipop' for over 30 years following the Volcker revolution and the return of high real interest rates to investment markets,” he said.

“Now, however, with governments attempting to impose financial repression, bond investors should revolt,” he added.

“PIMCO advocates not so much a mutiny but a renewed vigilance on this new ship, stressing bond market safe spread alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies,” Gross said.