Reassessing Bond Bets: ‘Bond King’ Bill Gross Predicts Economic Slowdown

Even the staunchest bond bears on Wall Street are reevaluating their positions as they witness what they consider an overheated market rout on Treasury bonds. Billionaire investor Bill Ackman, founder of Pershing Square Capital Management, is among those who’ve changed their tune. He emphasized, “There is too much risk in the world to remain short bonds at current long-term rates.” Now, the “Bond King” himself, Bill Gross, has joined the chorus, suggesting that it’s time for investors to embrace bonds.

Bill Ackman’s Concerns

Bill Ackman, the founder of Pershing Square Capital Management, voiced his concerns about shorting bonds at current long-term rates, highlighting the global risk environment.

Bill Gross’s Call to Action

Bill Gross, the former chief investment officer of Pacific Investment Management Co. (Pimco), took to X, the social media platform previously known as Twitter, to encourage investors to “invest in the curve” on bonds, which have recently experienced a significant selloff.

Surging Yields and Bond Prices

Yields on 10-year government bonds surged to over 5% last week, a level not seen in 16 years. Similarly, 30-year bonds spiked to approximately 5.2%. The fundamental principle at play is that when Treasury bond yields rise, Treasury bond prices fall. This explains why investors like Ackman have been shorting, or betting against, bond prices.

Time to Scale Back on Yield Bets

While some experts anticipate yields rising above 6% due to a high base rate and expectations of increased bond supply, both Gross and Ackman are advocating scaling back bets on further yield increases. Gross remarked, “‘Higher for longer’ is yesterday’s mantra.”

A Shifting Economic Outlook

Previously, many on Wall Street hoped that the Federal Reserve (Fed) would orchestrate a “soft landing” characterized by slow growth but not a full-blown recession. However, Gross now contradicts this view, stating, “Regional bank carnage and a recent rise in auto delinquencies to long-term historical highs indicate the U.S. economy is slowing significantly.”

Fed’s Response to Yields

Surprisingly, the yield spike in Treasury bonds has played into the hands of the Fed, as Chairman Jerome Powell noted. Powell suggested that the rise in yields is contributing to a tightening of financial outlooks. This shift, Powell believes, may reduce the need for future Fed rate increases.

Expert Insights

Professor Jeremy Siegel from the Wharton School at the University of Pennsylvania shares this viewpoint and argues that the Fed will refrain from raising rates again, partly due to the bond market’s influence. He noted, “Concerns about rates staying higher for much longer are keeping long yields ticking higher. I do think the recent high inflation that we’ve experienced is raising the premiums and compensation demanded to own bonds.”

The Bond Market’s Impact

Like Ackman and Gross, Siegel advises taking a long-term approach, cautioning that the current market upset is not merely a “short-term phenomenon.” He further explains, “The higher long-end rates are tightening conditions without the Fed raising short-term rates. It seems Powell has been very successful at getting unanimity and no dissent, and the chorus from recent Fed officials hinted for another pause.”

Indeed, Professor Siegel contends that the bond market is not only influencing the shift from rate hikes to a pause but also pushing the Fed into a “permanent pause mode.”