When PIMCO’s Bill Gross declared last month that “the secular 30-year bull market in bonds likely ended” on April 29, it was the shot heard around the fixed-income world.
But many people wrongly assumed that dramatic declaration meant Gross was turning outright bearish on bonds. As the manager of the $293 billion Total Return Bond Fund explains in the accompanying video, that isn’t necessarily the case.
“Investors should look at the yield on at 10-year…and see whether that legitimately in this environment provides some type of return,” Gross tells me. “Six weeks ago at 1.6% [the 10-year yield] was more than skinny. Where we are now, [over] 50 basis points higher, is a much better situation than where we were then.”
In other words, price matters, and the recent drop on Treasury prices – which move in opposition to yields – has made Gross a buyer again, at least in recent weeks as the yield moved above 2% to this morning’s 14-month high of 2.27%.
This is a “decent environment to earn your carry,” Gross says. “The Total Return Fund...is not as vulnerable as investors believe it to be as witnessed in May,” he said, a time when the fund fell 1.9%, its biggest monthly loss since September 2008, and its first month of outflows since 2011.
By the same token, Gross isn’t wildly bullish either, reiterating PIMCO’s house view that we’ve entered a ‘new normal’ of sluggish economic growth and low returns.
“Investors are going to have to know [yields are] being repressed and what they’re getting for their money is not what they should be getting,” he says. “But it doesn’t mean they should go home and put it in a mattress.”
And with “safe carry,” Gross seeks to draw a distinction between PIMCO's Total Return Fund and other speculators, whom he says are in danger.
“The whole world…the credit space, high-yield space, equity space, currency space – is enamored and hooked on carry, in fact levered carry," he says. “Some of this and the funding of it is vulnerable based on the yen carry trade. It looked good for a while but when the yen goes up in price vs. down and JGB yields go up as opposed to down then funding of this fabulous carry trade presents a risk for levered trades...there’s more risk now in all assets than there was before.”
Repeating something he’s written (and Tweeted), Gross declares: “Never have investors reached so high for so little return [and] stooped so low for so much risk.”