What’s Going On Here?Legendary investor Bill Gross said this week that bonds – once his bread and butter – are now complete “trash”. What Does This Mean?Bill Gross co-founded major bond investment firm PIMCO back in the 1970s, so it’s no surprise that investors take note of his opinions even now he’s retired. And their ears perked up this week: Gross said he reckons 10-year US government bonds – a.k.a. “Treasuries” – could fall by around 3% over the next 12 months (tweet this).
He might be onto something: the Bloomberg Treasury index is down 1.4% this year, which puts it on track for its first annual decline in eight years. And even corporate bonds are slipping, with so-called “investment-grade” bonds all set for their worst year since 2015. Little wonder, then, that Gross is recommending investors avoid both bonds themselves and bond investment funds. Why Should I Care?For markets: Here’s why Bill might be right.
The US central bank has been buying about 60% of all newly issued government bonds, but that bond-buying is set to start slowing in the next few months. The supply of new bonds, meanwhile, isn’t expected to drop off anytime soon. And if investors listen to Gross and do away with the bonds in their portfolios, demand could drop sharply and drag prices down with them.
The bigger picture: There really is no alternative.
Stock and bond prices usually move in opposite directions, or at least not sharply in the same direction. So it’s strange that they’ve both been rising strongly in the US over the last five months. That’s partly down to our old friend “TINA”: bond yields are so low that “there is no alternative” – stocks are the only real choice investors have had. That correlation might hold in future, but the direction might reverse course: Gross doesn’t just think bond prices will tumble soon, but that stocks could follow if company earnings growth starts to fall short of investors’ expectations. | 