(Bloomberg) — The one-time king of the bond world is talking down the Treasury market.
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While the yields may have peaked this year, “a bull market is not in the cards,” Bill Gross, the former chief investment officer of Pacific Investment Management Co. wrote in his investment outlook.
Gross’s call goes against a growing number of investors who expect a bond rally amid speculation that the Federal Reserve may end its monetary policy tightening after one more hike next week. Ten-year yields have fallen to about 3.8%, from this year’s high of 4.1% set in early July, following a softer-than-expected inflation report last week.
Gross, who retired from asset management in 2019, highlighted three reasons why investors should curb their enthusiasm.
Skyrocketing government deficit is adding supply pressure in the bond market at a time when the Fed is offloading its holdings, a combination that is set to keep 10-year yields above 3.5% “for a long, long time,” he said.
Historically, the 10-year yields trade more than 140 basis points above the Fed fund rate.
Even if cooling inflation allows the Fed to cut borrowing costs to 2.5% — the central bank’s estimate of the long-run neutral level — from more than 5%, benchmatk yields should be at 3.9%, according to Gross. Higher inflation could even push bond yields above 4% in the next two years.
In addition, the European Central Bank has “more work to do” than the Fed in its efforts in reining in inflation, exerting a “gravitational upward pull” for US yields, he added.
“Ultimately, but not now, as the market awaits a future Fed easing policy, bondholders will experience a continuing bear market, with negative implications for stocks as well,” Gross said.
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