- Billionaire investor Bill Gross has said bonds are “investment garbage” given high prices and low yields.
- He also said that stocks could soon become trash too if earnings start to disappoint investors.
- Gross thinks bond yields are likely to jump over the next year as the Federal Reserve cuts back its purchases.
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Famed investor Bill Gross has said sky-high prices and ultra-low yields mean bonds are “investment garbage” – and warned that stocks could soon become trash if company earnings fail to impress.
Gross said in his latest investment outlook letter this week that bond yields – which move inversely to prices – should rise sharply over the next year, causing losses for investors in the assets.
“Cash has been trash for a long time but there are now new contenders for the investment garbage can,” he wrote. “Intermediate to long-term bond funds are in that trash receptacle for sure.”
Gross cofounded investment giant Pimco in 1971 and was once widely known as the Bond King. The 77-year-old retired from professional investing in 2019.
He said the yield on the 10-year US Treasury note should rise to 2% over the next 12 months from the current 1.29% level, as the Federal Reserve cuts back on its asset purchases in response to strong growth and inflation. Such a rise would cause losses in the region of 3% for investors, Gross said.
Gross also said he thinks stocks could soon be seen as “garbage” too, hinting that he thinks stock prices are worryingly high. “Earnings growth had better be double-digit-plus or else they could join the garbage truck,” he wrote.
His view runs counter to many on Wall Street, however, who think US stocks should continue to edge up as the labor market recovery continues. Goldman Sachs reckons the S&P 500 will rise to 5,800 in the next 12 months, from 4,524 on Wednesday.
Gross argued that a number of factors are creating a cloudy outlook for bonds. He said the likely winding down of bond purchases by the Fed should weigh on prices, especially given that the government is likely to borrow large amounts to fund its spending priorities, requiring more bonds to be issued.
“Perhaps if inflation comes back to the 2%+ target by then, a ‘tantrum’ can be avoided,” he wrote. “But how many more fiscal spending programs can we afford without paying for it with higher interest rates?”
Gross said he thinks bond yields have “have nowhere to go but up.”