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Bill Gross’ Only Forecast in 2017: Watch the 2.6% Level

Bill Gross – Investment Outlook, January 2017

  • Happiness has dominated risk markets since election and despair has characterized global bond markets
  • Critical question for 2017: are risk markets overpriced and Treasuries overyielded?
    • Hope for stronger growth via Republican fiscal progress/reduced regulation/and tax reform have encouraged risk
    • Potential for higher inflation and a more hawkish Federal Reserve lie behind the 100 basis point move in the 10-year Treasury from 1.4% to 2.4%
  • Assessment of future growth and associated risk spreads is still uncertain
    • Value is dependent on a jump step move from the 2% real GDP growth rate of the past 10 years to a 3%+ annual advance
    • Historically, 3% growth rates have propelled corporate profit to a higher clip because of financial and operating leverage dependent on higher growth
    • 2% or less has smothered corporate profits
  • I am skeptical of 3% and more confident of the 2%
    • Demographic negatives associated with aging population, high debt/GDP more at risk due to rising interest rates, technology displacement of human labor, and deceleration/retreat of globalization
    • Trump’s policies may grant a temporary acceleration but a 2% longer term standard is likely in place
  • Fed has begun to tighten policy but other major central banks continue with buybacks
    • Japanese 10-year yields at near 0% and ongoing dovishness of ECB
    • Global arbitrage effectively caps the 10-year at 2.4% to 2.6% levels
    • Currency adjusted yield pickups of 70bps by selling 10-year JGB’s and German Bunds and buying US Treasuries, outline the artificial pricing of our 10-year
  • For 10-year Treasuries, a multiple of influences obscuring a rational conclusion that yields must inevitably move higher during Trump’s first year in office
    • When fundamentals are confusing, technical indicators may come to the rescue – this is where a three decade downward sloping trend line for 10-year yields could be critical
    • 30 basis point declines on average for the past 30 years lowered the 10-year from 10% in 1987 to the current 2.4%
  • Now, this downward trend line is at risk of being broken
    • 2.55% to 2.6% is the current “top” of this trend line, and over the past few weeks it has held and reversed lower by 15 bps or so
    • My only forecast for the 10-year in 2017: if yields move higher than 2.6%, a secular bear bond market has begun; watch the 2.6% level – much more than Dow 20,000, $60 oil price, dollar/euro parity at 1.0

Bill Gross, considered the “king of bonds”, is the co-founder and former Co-CIO of PIMCO. He left PIMCO in 2014 and joined Janus Capital as Managing Director and CIO. Janus Capital is an investment firm based in Denver, CO with disciplines across fixed income, equity, global macro, and alternatives. 

Image source: Janus Capital
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