Bill Gross: Bear Market in Bonds Is Already Here

10 Weird State Taxes and Exemptions

How to Use RMDs to a Clients Advantage: Morningstars Benz

5 Peeks at a Hot New Variable Annuity Guarantee Paper

U.S bonds are in a bear market that started in July 2016 when the 10-year Treasury note “double-bottomed at 1.45%,” says Bill Gross, the Pimco co-founder who’s now a portfolio manager for the Global Unconstrained Bond and Total Return strategies at Janus Henderson.

The July bottoms signified the end of a bull market that began 35 years earlier, but they weren’t recognized as such at the time, notes Gross in his latest market outlook.

“Eighteen months ago, it was obvious to most observers that the economy, measured by nominal GDP, was not going to go much lower than 3% and that the Fed was having second thoughts about quantitative easing,” but the bond market wasn’t priced for that, writes Gross. It was priced instead for “perpetual QE and the possibility of a deflationary collapse in the economy” — neither of which happened.

What happened instead was the 10-year Treasury yield plateauing between 2% and 2.25% for several years and high-yield bond prices rising enough to help index portfolios holding some return around 5% in 2017, which soothed bond investors, writes Gross.

But those days are over, according to Gross. “That 5% number may be hard to duplicate. High-yield spreads are compressed and not likely to provide future capital gains and the situation in Treasuries [yielding 2.55% at the time of his writing] is not conducive to a ‘total return’ environment.”

Gross expects the 10-year Treasury will end this year with a yield above 2.7%, capping a “mild bear market total return of zero to -1% for most bond portfolios.”

“We have begun a bear market although not a dangerous one for bond investors,” writes Gross. “Annual returns should still likely be positive, although marginally so.” 

Gross bases his bond outlook on a nominal GDP of 5% (it was 5.3% in Q3 2017, the latest available data), boosted by stimulus from tax cuts, an increasing budget deficit and the reduction of quanitative easting by the Fed and other central banks. “The dimunition of QE check writing and a 5% nominal GDP should be enough to produce higher 10-year Treasury yields, near 0% total returns, and the legitimate characterization of the beinning of a mild bear market,” writes Gross.

Gross, as usual, hedges his forecast. He notes that he’s not saying there will be “any more than two Fed hikes this year or that the ECB, the BOE and certainly the BOJ will raise short rates anytime soon,” which is surprising since the market consensus is at least three Fed rate hikes this year. Moreover, even though there’s been a 140-basis-point spread between the 10-year Treasury and nomninal GDP since 2009, which would mean a 10-year Treasury yield of 3.6% (5% -1.40%), Gross writes he’s “not that negative.”

He concludes his outlook, as he began it, referring to the #MeToo movement that has put men in a bear market. “Oprah shouted, ‘Their time has come.’ The bear bond market’s time has come as well.”

— Related on ThinkAdvisor:

Were moving from a smooth gallop to a bumpy grind, the Nuveen chief equity strategist says.

You are signed up!

A survey of advisors nationwide reveals how the use of ETFs is expanding and what factors are likely to further support this trend. width:300px!important;max-height:36px; Financial Education Resource Center Financial Education Resource Center

ThinkAdvisor and the College for Financial Planning have partnered to bring you a series of helpful educational tools that you can use to take your career to the next level. padding: 0px 81px;width: inherit; Retirement Wire Retirement Wire

Your resource for news, research and analysis to help you deliver more effective outcomes to your clients. width:300px!important;max-height:36px; ThinkAdvisor TechCenter

ThinkAdvisor’s TechCenter is an educational resource designed to give you a competitive edge by keeping you abreast of new tech innovations and need-to-know information that can be applied to your business. Resources The Advisor’s Guide to Digital Marketing

A comprehensive handbook for attracting clients through digital marketing.

In an increasingly competitive industry, advisors and independent broker dealers need to differentiate their firm. Learn how providing tax alpha at scale gives you a…

The business call is back! Learn how to drive more calls to your business line, create a great experience over the phone, and win more…

Join this webcast to see how Trisha Qualy, Director of Wealth Management at AdvisorNet Financial, took client assets from $100 million to $1.3 billion in…

Join this complimentary webcast to learn innovative strategies that have proven effective in containing rising health costs.

Join this conversation as a panel of experts provides tips and best practices to optimize your tech resources for business growth.

Leave a Reply

Your email address will not be published. Required fields are marked *