Even ‘Bond King’ Bill Gross warns ‘don’t own bonds’ as long-term debt enters a new ear of volatility

Bond investing pioneer Bill Gross, known as the "Bond King," has cautioned against owning bonds in a new era of market volatility. In a Financial Times op-ed, Gross warned that "too much debt can lead to too much risk and too much equity can lead to less earnings per share growth." Currently, government, mortgage, and corporate credit totals around $84 trillion, indicating an unbalanced credit landscape.

Gross highlighted that federal debt has already reached peak levels for peacetime, now at 100% of GDP. He observed that while growth is currently fueled by debt, it may slow in the future due to higher inflation and potential declines in earnings per share growth. Gross recommends avoiding bonds, with the sole exception of one-year Treasury bills, which are currently yielding 4.55%.

He cautioned about the risks associated with stocks at record levels, suggesting that higher yields may contract profit margins. He anticipates a shift in market dynamics as central banks diversify their reserves, hedge funds become more active in the bond market, and the basis trade among hedge funds increases volatility. These developments have already led to a surge in 10-year Treasury yields, surpassing levels not seen in 24 years.

Gross expressed skepticism regarding AI hyperscalers, urging caution unless their price-to-earnings ratios are below 20. He also noted that some income funds trading at a discount may present opportunities, but are vulnerable to rising short-term interest rates. Overall, Gross's advice is to "preserve and protect" in the current market environment.