- Bill Gross says bond prices will be higher rather than lower in the near term as Treasury issuance surges.
- The US economy needs a high level of debt to propel the GDP growth, he said.
- Gross also said the "total return" bond strategy he helped develop in the 1980s is dead.
The high level of US debt issuance signals to investors that they should expect yields to move higher, not lower, according to "bond king" Bill Gross.
The billionaire investor and PIMCO co-founder wrote in a note on Thursday that the US fiscal deficit, largely driven by a massive rollout of Treasury bonds, is now deemed a "necessity" to propel the economy forward, which is fueling upward pressure on bond yields.
He highlighted that the outstanding balance of Treasurys has surged at over a 10% annual rate for the past 18 months, thanks to post-COVID deficits of $2 trillion-$3 trillion dollars. By the end of 2023, the Federal government had racked up nearly $30 trillion in debt.
"The US economy requires fiscal deficits and net increases in Treasury debt of 1-2 trillion or more annually in order for the economy to grow," Gross noted. "That's a lot of bonds," he added.
Gross explained that while Treasury debt has been growing at a rapid rate, other types of debt, including business and household debt, have been growing more slowly.
As a result, in order to make up for this difference, the government must ramp up Treasury debt by over 10% to uphold 5.5% nominal GDP growth, he wrote.
"Look for 5% plus 10-year yields over the next 12 months — not 4.0%. Those that argue for lower rates have to counter the inexorable upward climb in Treasury supply and the likely Sisyphean decline in bond prices," Gross said.
Gross also noted that the "total return" bond investing strategy he helped pioneer in the 1980s is dead as bond yields are much lower than that period, with less opportunity to make money on movements in the price.
"Total Return is dead. Don't let them sell you a bond fund," he said.