Bill Gross Says Record-Low Bond Yields ‘Aren’t Worth the Risk’

  • Treasuries decline after German, Japan, U.K. yields rise
  • Investors consider outlook for central-bank policies after BOJ

Bill Gross Turns Away From Bonds, Looks to Gold

The world’s safest assets are getting too risky for Bill Gross.

The 72-year-old bond-fund manager reiterated his warning on sovereign debt after yields from the U.S. to Australia touched all-time lows in the past month. The danger of the unprecedented rally, as Gross sees it, is that any reversal will be painful for investors. Just take events on Tuesday, when losses in Japan rippled across bond markets.

“Sovereign bond yields at record lows aren’t worth the risk and are therefore not top of my shopping list right now; it’s too risky," wrote Gross, who built the world’s biggest bond fund at Pacific Investment Management Co. and is now at Denver-based Janus Capital Group Inc. "Low yields mean bonds are especially vulnerable because a small increase can bring a large decline in price.”

His Janus Global Unconstrained Bond Fund has returned 3.9 percent this year, ranking it in the 67th percentile.

Negative-interest-rate policies and quantitative easing from central banks in Japan and Europe have driven investors there to look abroad for returns, pushing up bond prices worldwide. A Japanese 10-year note auction drew the weakest demand in five months Tuesday as spending measures announced by Japan’s government underwhelmed investors. Yields climbed in Germany, the U.K and the U.S.

Global Yields

Treasury 10-year yields rose three basis points, or 0.03 percentage point, to 1.56 percent as of 5 p.m in New York, according to Bloomberg Bond Trader prices. The yield fell to a record low 1.32 percent on July 6.

Similar-maturity gilt yields rose eight basis points to 0.81 percent. Japanese 10-year bond yields climbed six basis points to minus 0.08 percent, touching the highest since March.

Investors are considering the outlook for global central-bank policies after the Bank of Japan made only minor adjustments at a meeting last week, boosting speculation it may be running out of options for further easing.

“Quantitative easing in Japan has proven not to have the effects that policy makers wanted it to have,” said Matthew Cairns, a strategist at Rabobank International in London. “Parallels are being made in Europe now: are we looking at a similar dynamic here as to what we’ve seen for decades in Japan?”

The spillover from Japan’s recent selloff into global bond markets comes after a rout last year that erased more than $750 billion in value from sovereign debt. The retreat began in Europe in April 2015, a month after the European Central Bank started its asset-purchase program, and spread around the world. German 10-year yields jumped from a then-record 0.049 percent that month to as high as 1.06 percent by mid-June.

Gross’s view is echoed by Fitch Ratings, which said in a note Tuesday that a hypothetical surge in yields to July 2011 levels would trigger losses of as much as $3.8 trillion for $37.7 trillion worth of investment-grade global sovereign bonds. Ten-year Treasury yields averaged about 2.98 percent during that period.

"This year’s dramatic fall in yields on bonds issued by investment-grade sovereigns has again raised the risk that a sudden interest-rate rise could impose large market losses on fixed-income investors around the world," Fitch said.

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