May 10, 2013 / 4:12 PM / 5 years ago

Pimco's Gross: 'Gut feeling' that bond bull run is done

NEW YORK (Reuters) - Circle the date, market mavens: April 29, 2013. AKA, the day the bond bull died. Age 31 years, 7 months.

Pacific Investment Management (PIMCO) founder and co-chief investment officer Bill Gross plays golf on the first hole at Pebble Beach Golf Links before the start of the AT&T Pebble Beach Pro-Am in Pebble Beach, California, February 8, 2012. REUTERS/Robert Galbraith

That, at least, is the call from Bill Gross, who is known on Wall Street as “the Bond King.”

Gross, the manager of the world’s largest bond fund, the Pimco Total Return Fund, with $289 billion in fixed-income assets, set the Wall Street Twittersphere alight early Friday with this 62-character missive: “The secular 30-yr bull market in bonds likely ended 4/29/2013.”

Moreover, Gross says it’s over for more than just Treasuries, the cornerstone of the $38 trillion U.S. bond market. The upward run is finished for “all bonds,” he said in a follow-up email to Reuters, including low-quality corporate debt, or junk bonds, whose yields fell below 5 percent this week for the first time.

The “price peak refers not to Treasuries but to all bonds, including a weighted amount of high-yield debt. Thus the 4/29 date will not exactly correspond to a bottom in 10-year Treasury yields, for instance,” Gross said.

He said his call is a “gut feeling” that the bull market in fixed income ended on April 29.

The date was a Monday, and the yield on the benchmark 10-year Treasury note, which moves in the opposite direction to the note’s price, dropped to a fraction above 1.65 percent, right around its low of the year. Since then, Treasuries have had a rotten start to May, with yields rising 0.22 of a percentage point, briefly topping 1.92 percent on Friday.

April 29 was also the day before U.S. Federal Reserve policy makers convened their latest two-day meeting, which ended with a statement signaling the central bank stood ready to increase the pace of its unconventional monetary policy, a bond-buying program called quantitative easing, if needed to boost the sluggish economy.

While Gross’s commentary is widely followed by investors, not all of his calls have been spot on. In 2011, he had one of his worst years ever by betting that yields would rise with an inflation threat that never materialized, thus selling all of his holdings in Treasuries.

Last summer, he mused that the “cult of equities” was dying. The benchmark Standard & Poor’s 500 Index is up 18.8 percent since then.

To be fair, Gross’ declaration is more a culmination than a revelation. He has been growing ever more bearish on the prospect for bonds since the Fed took short-term interest rates essentially to zero at the end of 2008 and the central bank then began hounding investors out of safe assets through its three QE programs, each more aggressive than the one before.

Gross, a 69-year-old former Navy officer and one-time professional card player, has been a bond market fixture for 42 years. He co-founded the Pacific Investment Management Co. in 1971, only to endure a decade-long bear market in bonds that took the yield on the 10-year Treasury to a peak of around 15.8 percent on September 30, 1981. The yield on two-year notes had peaked earlier that month at an even higher level: 16.95 percent.

Since then, though, the bond market’s been a gravy train.

According to Bank of America/Merrill Lynch Fixed Income Index data, a broad basket of U.S. fixed income securities, including Treasuries, corporate bonds and mortgage-backed securities, has delivered a total return of 1,420.5 percent since the beginning of October 1981. That was right after yields hit their highs, and the campaign to beat back inflation led by Paul Volcker, then the Fed chief, finally began paying off.

While that’s less than half the total return on stocks - the S&P 500 generated a total return, including reinvested dividends, of 3,144 percent over the same run - bond investors have enjoyed three decades of consistent gains with far less volatility.

Gross launched the Total Return Fund in May 1987, and it has delivered a total return of 694.5 percent since inception, outperforming the 506 percent return on U.S. bonds more broadly in the same period.

Gross cautioned that his call for a top in the market does not mean the bottom will fall out imminently.

“A bear market is not in the cards until growth and inflation threaten current Fed policies,” Gross said in his email to Reuters.

The economy has been limping along since the recession ended, generating gross domestic product growth of better than 3 percent in just three of the past 15 quarters. Inflation, meanwhile, has been running just over 1 percent, roughly half of the Fed’s target level.

“We expect prices to stop going up but not to start going down,” Gross said.

In fact, Gross just increased his Treasury holdings in the Total Return Fund to 39 percent from 33 percent in March. Gross has said that he likes bonds within the five-year and shorter maturities as they will “do best based on continuing policy rate.”

And bonds also continue to attract investor cash, even with yields near record lows. U.S. mutual funds investing in taxable bonds took in a record $8.88 billion in the latest week, according to fund tracking firm Lipper, a unit of Thomson Reuters.

Reporting By Jennifer Ablan and Dan Burns; Editing by Chizu Nomiyama and Leslie Adler

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