Janice R. Andrews
Billionaire investor and “bond king” Bill Gross has issued a harsh warning over the direction of bond rates, stating that they are expected to rise rather than fall in the near future. Gross’s findings, detailed in a recent letter, give light on the convergence of variables powering this rising trend and signify a break from traditional market expectations.
The focal point of Gross’s analysis is the exponential increase in Treasury issuance, which he primarily attributes to the US fiscal deficit. This deficit, driven by the need to drive economic growth, has required an extensive distribution of Treasury bonds, which has driven up bond yields. Gross explains that the total amount of Treasurys outstanding has increased at an alarming rate of more than 10% per year over the last 18 months, driven by post-COVID deficits of $2 trillion to $3 trillion. By the end of 2023, the federal government was indebted to the tune of approximately $30 trillion, a figure representative of the extent of fiscal intervention undertaken.
Gross argues that “the US economy necessitates fiscal deficits and substantial increases in Treasury debt of $1-2 trillion or more annually to sustain growth,” highlighting the crucial role that government debt plays in promoting economic progress. He does, however, issue a warning, pointing out that this pattern of rising Treasury issuance is a sign of an approaching change in the dynamics of the bond market.
Gross compares the relatively slow expansion in other types of debt, such corporate and personal debt, with the sharp rise in Treasury debt. He suggests that in order to sustain equilibrium and a nominal GDP growth rate of 5.5%, the government has to increase its Treasury debt by more than 10%. This divergence highlights how important Treasury issuance is to maintaining economic momentum, even while it puts increasing pressure on bond yields.
Dispelling predictions of a declining yield trend, Gross warns, “anticipate 5% plus 10-year yields over the next 12 months—not 4.0%.” He warns proponents of lower rates to face the unstoppable increase in the supply of Treasury bonds, which is a factor that inevitably lowers bond prices. This grim outlook casts doubt on the mood of the market and emphasizes how important it is for investors to lower their expectations.
In addition, Gross declares the end of the “total return” bond investment approach, a paradigm he helped create in the 1980s. Since bond yields are stuck at all-time lows, there are less and fewer possibilities to profit from market changes. As such, Gross advises against trusting one’s money to bond funds that are based on antiquated methodologies that are inappropriate for the current state of the market.
Essentially, Gross’s warnings are a wake-up call for investors to prepare for a paradigm change in the bond market. The mutually beneficial link between Treasury issuance and bond rates predicts a market where yields will continue to rise despite widespread expectations that they will decline. Gross’s observations are a wise guidance for investors navigating this changing landscape, as they emphasize flexibility and alertness in the face of changing market conditions.
