Gross Calls Sovereign Bonds Too Risky With U.S. Yields Near Lows

Gross: Inflation Expectations Too Low on 30-Year Bonds
  • Yield on World Sovereign Bond Index falls to less than 1%
  • Demand for debt is waning following plunge in yield, CIBC says

Bill Gross said sovereign bond yields at record lows aren’t worth the risk.

“The sovereign bonds are not up my alley,” Gross, who built the world’s biggest bond fund at Pacific Investment Management Co. and is now at Denver-based Janus Capital Group Inc., said on Bloomberg Television Wednesday. “It’s too risky.” Low yields mean bonds are especially vulnerable because a small increase can bring a large decline in price, he said.

Yields in the U.S., the U.K. and Australia pushed to all-time lows Wednesday, while those in Germany and Japan dropped to unprecedented levels below zero. The average yield on the bonds in Bank of America Corp.’s World Sovereign Bond Index this week dropped below 1 percent for the first time, based on data going back to 2006, while almost $10 trillion of securities in the Bloomberg Global Developed Sovereign Bond Index yield less than zero.

Bonds are rallying on speculation the British vote to leave the European Union will damp global economic growth, driving demand for the safest assets. The Federal Reserve is losing confidence in its need to raise interest rates as officials face rising uncertainty about the outlook for growth at home and abroad, the minutes of its most recent meeting issued Wednesday indicate.

Benchmark Treasury 10-year note yields were little changed at 1.38 percent as of 6:50 a.m. in New York, according to Bloomberg Bond Trader data. The record low set Wednesday was 1.318 percent. The price of the 1.625 percent security due in May 2026 was 102 1/4.

Negative-Yield ‘Supernova’

The Janus Global Unconstrained Bond Fund, which Gross runs, has returned 3.5 percent this year, outperforming 78 percent of its peers, according to data compiled by Bloomberg. It had less than 1 percent of its assets in government securities as of the end of April, the data show.

Gross warned almost a month ago central bank policies that pushed trillions of dollars into bonds with negative interest rates will eventually backfire violently. “This is a supernova that will explode one day,” he wrote on Twitter.

For more on the outlook for negative bond yields, click here.

Australian 10-year bonds yielded 1.87 percent, versus a record-low of 1.84 percent, after S&P Global Ratings lowered the outlook on nation’s AAA rating to negative from stable as an unclear outcome from the weekend’s federal election dented the prospects for reining in the budget deficit.

Demand for sovereign debt is waning following the plunge in yields, said Kazuaki Oh’E, the head of fixed income at CIBC World Markets Japan Inc. in Tokyo.

“If you have U.S. Treasuries in your inventory, you are very lucky,” Oh’E said. “You can enjoy profit-taking and shift to corporates or other income products. There’s no way to invest in minus yields” in Europe or Japan, he said.

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