Fixed income will be a hot topic moving into 2018
Oprah Winfrey’s Golden Globe Awards pronouncement that “Time is up” for men who oppress women also goes for the bond market that’s been buoyed by repressed interest rates, according to Bill Gross.
“Bonds, like men, are in a bear market,” Gross, manager of the US$2.2 billion Janus Henderson Global Unconstrained Bond Fund, wrote in an investment outlook released Thursday. “Oprah shouted, ‘Their time has come.’ The bear bond market’s time has come as well. Many would say, including yours truly -- ‘It’s about time.’ ”
The flippant comparison is among a series of surprising metaphors Gross has employed in his career. In his colourful monthly investment outlook pieces he has referenced his cat, “Mad Men” and offered dating advice. Last year, he called Federal Reserve Chair Janet Yellen a “modern day Goldilocks” and referred to quantitative easing as “financial methadone.” In 2007, he famously said that Moody’s Investors Service and Standard & Poor’s were duped by the make-up and “six-inch hooker heels” of risky securities that were given investment-grade ratings.
The end of a 35-year bond bull market may have been July 2016, when yields on 10-year Treasury bonds hit an all-time low in a “double-bottomed” pattern, although it wasn’t apparent at the time, according to Gross. The bear market was confirmed this week as rates on the 10-year passed 2.5 per cent, he tweeted on Tuesday.
Other bond managers say yields have to climb higher to enter bear territory. Guggenheim Partners’ Scott Minerd said in email that the bull market remains intact unless the 3 percent level is broken, adding that even then the lows could be retraced again before “a generational bear market” starts.
According to Gross, yields are likely to climb to at least 2.7 per cent by year-end. The driving forces include global economic growth, the U.S. Federal Reserve raising its benchmark rate and other central banks reducing quantitative easing policies of buying sovereign debt to repress rates.
“The diminution of QE check writing and a 5 per cent nominal GDP should be enough to produce higher 10-year Treasury yields, near 0 per cent total returns, and the legitimate characterization of the beginning of a mild bear market,” Gross wrote.
Gross’s Janus unconstrained fund returned 2.4 per cent in 2017, better than 26 per cent of its peers, according to data compiled by Bloomberg. It returned an average of 2.5 per cent annually in the three years through Jan. 9, better than 43 per cent of competitors.