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HomeEconomyBill Gross Warns: High Treasury Issuance to Keep Bond Yields Elevated

Bill Gross Warns: High Treasury Issuance to Keep Bond Yields Elevated

Billionaire investor Bill Gross, often revered as the “bond king,” has issued a stark warning about the future trajectory of bond yields in the United States. According to Gross, the substantial levels of U.S. debt issuance, driven by a significant rollout of Treasury bonds, are likely to push yields higher rather than lower.

In a detailed note released on Thursday, Gross, the co-founder of PIMCO, elaborated on the U.S. fiscal deficit’s role in this economic dynamic. He described the ongoing large-scale Treasury bond issuance as a “necessity” to propel the economy forward, contributing to the upward pressure on bond yields.

Gross pointed out that the outstanding balance of U.S. Treasurys has been increasing at an annual rate of over 10% for the past 18 months, fueled by post-COVID deficits ranging between $2 trillion to $3 trillion. By the end of 2023, this aggressive fiscal strategy had ballooned the Federal government’s debt to nearly $30 trillion.

“The U.S. economy requires fiscal deficits and net increases in Treasury debt of $1-2 trillion or more annually for the economy to grow,” Gross stated, emphasizing the massive scale of bond issuance. “That’s a lot of bonds,” he remarked, underlining the volume of debt being pumped into the market.

Gross explained that while Treasury debt is expanding rapidly, other forms of debt like business and household debt are not keeping pace. This discrepancy necessitates an over 10% annual increase in Treasury debt to maintain a nominal GDP growth rate of 5.5%.

Forecasting the bond market’s future, Gross predicted, “Look for 5% plus 10-year yields over the next 12 months — not 4.0%. Those that argue for lower rates have to counter the inexorable upward climb in Treasury supply and the likely Sisyphean decline in bond prices.”

Moreover, Gross reflected on the evolution of bond investing strategies, noting that the “total return” strategy he pioneered in the 1980s is now obsolete. This strategy, which capitalized on bond yields significantly higher than those seen today, offered more lucrative opportunities to profit from price movements. “Total Return is dead. Don’t let them sell you a bond fund,” he cautioned, signaling a profound shift in the bond market landscape.

Bill Gross’s analysis presents a sobering outlook for bond investors, suggesting that elevated bond yields may be the new norm amid continuous high Treasury issuance. His perspective serves as a crucial piece of advice for those navigating today’s complex financial environment.