Gross Says This Key Bond Level Is A Far Bigger Deal Than Dow 20,000

Calls for the end of a more-than-three-decade bull market in bonds Deutsche Bank (DE:DBKGn) says 35-year party is over for bond bulls

Though that downward spiral for bond prices (yields rise as bond prices fall) has abated somewhat, prominent bond investor Bill Gross says the 10-year yield remains the most important factor in financial markets.

The former head of Pimco and present manager of Janus Capital’s global unconstrained bond fund said if the yield on the 10-year notelatest missive to investors , with an excerpt below:

Is this more important than the Dow Jones Industrial Average EURUSD, +0.2653% most recently at 1.05, possibly hitting parity with the euro?

Gross thinks so. After all, the benchmark bond influences nearly every corner of markets.

The shift in trend in bond yields is predicated on the belief that Trump’s policies, including increased fiscal spending and tax cuts among other proposals, will provide a boost to inflation—the enemy of long-term bonds because it erodes the value of fixed-interest payments. Gross notes that a widening divergence between the dovish monetary policies in Europe and those that are tilting toward normalization in the U.S., are expected to cap upside potential for the 10-year yield.

That is why Gross believes that the 2.60% top is important.

Moreover, a climb in yields has implications for stocks that have run-up over the past several months amid hope that Trump will make good on his promises. Higher yields can make the perceived safety of U.S. government bonds more attractive to buyers of comparatively risky stocks. Higher rates also can weigh on the economy by raising the cost of mortgages and boosting corporate borrowing costs.

Still, those rising yields might be manageable if it means that U.S. economic growth is humming along. And elevated rates are a boon for banks which borrow on a short-term basis and lend long-term. Gross thinks the growth trajectory remains unclear and that gross domestic product needs to touch an annual rate of 3% to help to boost corporate profits rather than the 2% rate GDP has hovered around over the past decade.

To be sure, not everyone believes that 2.60% is a magic demarcation point for Treasurys. Rival bond expert, Jeff Gundlach, who runs DoubleLine Capital, has said the benchmark 10-year yield needs to hit 3% to begin to challenge appetite for stocks and mark the end of a line of declining peaks in yield s.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Original post

Written By: MrTopStep