Renowned investor Bill Gross, often referred to as the “Bond King,” is advising investors to reconsider their stance on bonds in the face of an impending economic slowdown, even suggesting a possible recession in the fourth quarter. This shift in perspective comes as some of the most prominent bond skeptics on Wall Street are growing wary of the recent turmoil in the Treasury bond market.
Bill Ackman, the billionaire founder of Pershing Square Capital Management, was among the first to express concerns, stating, “There is too much risk in the world to remain short bonds at current long-term rates.” Now, Bill Gross, the former Chief Investment Officer of Pacific Investment Management Co. (Pimco), has joined in, recommending that investors consider buying bonds.
Gross, taking to X, the social media platform formerly known as Twitter, urged investors to “invest in the curve” of the bond market, which has experienced a selloff in recent months. This marks a notable shift in sentiment given the prevailing bearish outlook on bond prices, with yields on 10-year government bonds reaching over 5% for the first time in 16 years, and 30-year bonds similarly spiking to approximately 5.2%.
Traditionally, when Treasury bond yields rise, bond prices fall, leading many investors to short, or bet against, bond prices. However, Gross and Ackman believe it is time to reconsider these positions and scale back bets on further yield increases. Gross declared that the “higher for longer” approach is a thing of the past.
Previously, there was hope among many on Wall Street that the Federal Reserve would manage a “soft landing,” characterized by slow growth but not a full-blown recession. However, Gross has taken a different stance, citing “regional bank carnage” and a recent surge in auto delinquencies to long-term historical highs as indicators of a significant slowdown in the U.S. economy. He boldly predicts a recession in the fourth quarter.
Interestingly, despite the concerns surrounding the rising yields, Federal Reserve Chairman Jerome Powell has indicated that the spike has had a positive impact on tightening financial conditions. Powell’s view aligns with some of his colleagues at the Fed, who believe that the yield increase may reduce the need for future rate hikes.
Professor Jeremy Siegel from the Wharton School at the University of Pennsylvania shares this sentiment and suggests that the Fed might refrain from raising rates again on November 1, largely due to the bond market’s influence. He contends that concerns about higher rates persisting for an extended period are pushing long yields higher, emphasizing that the recent high inflation has led to increased premiums and compensation for owning bonds.
Similar to Ackman and Gross, Siegel advises adopting a long-term perspective, cautioning that the current market turbulence is not a short-term phenomenon. He believes that higher long-term rates are tightening financial conditions, and the consensus among recent Fed officials implies a potential pause in rate hikes.
In summary, the bond market’s impact not only influenced the transition from rate hikes to a pause but may also push the Federal Reserve into a “permanent pause mode,” according to Professor Siegel’s analysis.
