Bill Gross, who pioneered active management of bonds as a co-founder of Pacific Investment Management Co., is warning that it’s a bear market for bonds, albeit one that shouldn’t take a huge toll on investors.
In his latest monthly outlook, Gross, now at Janus Henderson Investors, wrote that “annual returns should still likely be positive, although marginally so. There are several significant reasons that should lead to a 2.7 percent year-end yield and a mild bear market total return of negative 1 percent for most bond portfolios.”
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Before readers reach Gross’s analysis of the bond markets, though, they first need to plow through his view of men. Gross goes from the banal of the gender needing “fewer pairs of shoes and purses” to the less benign. “Sure men start wars, but great things actually are a result of them. Canned foods owe their origin to Napoleon, microwave ovens to the invention of radar during WWII.” Gross wrote that he “could go on and on. I won’t. I don’t dare.”
Once through the man chapter, Gross said the bond bull market began faltering in either June 2012 or July 2016 when the 10-year Treasury bottomed at 1.45 percent. The this long run commenced in 1981 when yields began their descent from the high double digits. Gross was able to generate total returns on bonds, a concept that up until then had been exclusive to real estate and equities. That meant bond investors weren’t just clipping coupons — they were benefiting from price increases as well.
According to Gross, losses on bonds when yields rose in 2012 and 2016 were nowhere near what investors experienced in the 1970s. During that decade, bonds were actually referred to as certificates of confiscation, he continued. Last year, even indexed portfolios generated about 5 percent returns.
Now is different though, Gross said. High-yield bond spreads “are compressed and not likely to provide future capital gains. And the situation in Treasuries, although standing as I write at 2.55 percent, is not conducive to a ‘total return’ environment either.”
Gross’s rationale for a “mild” bear market is that the economy will likely produce 5 percent nominal GDP growth for the next couple of quarters. In addition, tax cuts and growing budget deficits will likely push the future inflation target to 2 percent, he said, which is the Federal Reserve’s goal. All of that would overvalue 10-year Treasuries at 2.5 percent. Gross also pinned his mild-bear forecast on the Fed and other global central banks retreating from quantitative easing policies. “Later this year, perhaps in September, net central bank purchases of sovereign and corporate notes and bonds may stop, or at least falter far below the $1 to $2 trillion pace of recent years.”
With a shout-out to Oprah’s now-famous line — “Time’s up!” — from the Golden Globe awards, Gross told readers of his monthly missives that, “the bear bond market’s time has come as well.”
