Government-bond prices have been in decline recently, and as a result the yield on the US ten-year Treasury bond has been rising (yields rise as prices fall). Experienced bond investor Bill Gross of Janus Henderson reckons that we’ve now seen a turning point. “The 35-year bond bear market is starting to come out of hibernation, waking up and starting to growl.” And not before time, he says. The gap between bond yields and nominal GDP growth is far above historical levels. Indeed, while US GDP is growing at as much as 5% a year, ten-year Treasuries are still yielding less than 3%, while UK ten-year yields are only around 1.4%, even though inflation is 3%.
And while US Treasuries are “leading the charge”, on speculation that the Federal Reserve may increase interest rates aggressively, the rise in bond prices is the “beginning of a global movement”. This is because “other central banks are catching up with the end of quantitative easing”. Even the European Central Bank is starting to change its monetary outlook. German bunds, which previously had a negative yield, are starting to rise into positive territory. This is no surprise – we should expect bond yields to rise across the world, because history teaches us that “yields on sovereign bonds tend to move together”. As a result, investors should consider selling global bonds in general.
Gross also thinks investors should consider a bet against the US dollar (even though it has weakened substantially). He’s unimpressed by both President Donald Trump and Treasury Secretary Steve Mnuchin, who “speak with forked tongues telling the market what they think it wants to hear”. Trump’s tax cuts have also expanded the deficit. But Gross is less worried about stocks – central banks’ obsession with asset prices suggests they will intervene if markets fall.