(Bloomberg) — Bill Gross and his former colleagues at Pacific Investment Management Co. agree on at least one thing: bonds are attractive now.
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Why? Because the market is now pricing in the Federal Reserve’s prime borrowing costs of a peak of 4.5%. That’s too high, according to Gross, the Pimco co-founder who was ousted from the bond powerhouse in 2014.
Fed Chairman Jerome Powell cannot raise rates to kill inflation the way his predecessor Paul Volcker did in the 1980s, because the US economy is now much more leveraged and global growth is slowing, Gross wrote in his opinion most recent. That means the two-year Treasury yield, currently 4.2%, is too high and rates across the curve have reached a “temporary” peak, he said.
His view is in line with a growing number of investors, including those at Pimco, who are finding value in bonds after the global fixed income market suffered an unprecedented 19% loss this year.
Earlier this week, Andrew Balls, Pimco’s chief investment officer for global fixed income, and economist Tiffany Wilding said the potential for a rebound in the bond market is “strong” after yields hit multi-year highs. Jeffrey Gundlach, chief investment officer at Doubleline Capital, said late last month that he was breaking up Treasuries.
While “inflation appears to be the Fed’s lone focus right now, economic growth and financial stability may soon catch up,” wrote Gross, the 78-year-old former bond king. . “Ever-increasing leverage is the culprit. The United States and many other economies cannot afford rate hikes.”
Gross co-founded Newport Beach, California-based Pimco in 1971 and rose to the pinnacle of the financial world after taking it into fixed income fundraising. In 2014, he shocked the financial world when he abruptly left the firm after clashes with other executives. Five years later, he retired from the asset management business.
It remains active in communicating market views, primarily through the investment outlook published on its website.
On Thursday, Gross said his personal portfolio is “leaning more toward a small percentage of medium-term bonds.”
An inverted yield curve — when short-term rates rise above longer-term yields — increases the risk of a downturn because banks will be reluctant to lend, choking off the flow of credit, according to Gross. The potential damage from the current inversion, or negative behavior, could be greater than previous recessions due to the higher debt burden.
“The longer and wider the negative behavior, the deeper the recession,” he wrote.
For gun-shy investors after this year’s brutal bond losses, Gross suggested buying the iShares exchange-traded fund (TIP), which invests in inflation-linked bonds.
Yields on five-year Treasury Inflation-Protected Securities, or TIPS, reached 2% on September 30, a level last seen in 2008. TIPS not only protect against inflation, they also provide the potential for capital appreciation if rates fall , it was said. Gross.
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