News & Opinions About Gold & Silver

February 25, 2024

Bond King Says Bonds Are Trash

Bond King Says Bonds Are Trash

Bonds are a ticking time bomb— and an expert confirms our worse fears. Bill Gross is the man formerely known as the “Bond King.” Today, Gross is warning that the Federal Reserve’s upcoming taper of bond buying will cause the benchmark yield to climb to 2% over the next 12 months. This will produce a 4% to 5% price loss and a 2.5% loss on a total return basis.

Simply put, buying Treasury Bonds at today’s rates will guarantee you’ll lose money. It appears that the Federal Reserve has manipulated interest rates to dangerous levels far too long. Raising those rates puts the Fed in a trap.

Bill Gross, writing on his blog, shocked folks when he said— “Intermediate to long-term bond funds are “trash.” He declared stocks will also belong in the garbage can unless they can grow earnings at a double-digit plus rate. 

The current 1.25% yield for the 10-year note means Treasury yields “have nowhere to go but up,” Gross wrote in a recent blog post. The yield began the year at 0.917%. 

As current interest rates rise, the value of long term bonds decline in value.

If that’s not bad enough, inflation is “running hot” currently at 5.4% for the past 12 months ending July 2021. There goes another 5.4% of buying power for every dollar invested in bonds long term!

Even if inflation magically fell back to a targeted 2% rate, then bonds are a lousy investment these days. What’s a worse investment arena? Banks with near nada CDs and checking accounts that pay embarrassing low rates.

Interest rates are great for borrowers but “trash” for savers. It’s very hard to imagine how this will all work out when interest rates rise thereby pushing down stocks, causing businesses to pay more to borrow, and eating into profits.

Unwinding the Federal Reserve’s bond buying binge will have serious implications for future. Recently, the Institute of International Finance found 60% of new Treasury Bonds issued over the past 12 months were sold through the Federal Reserve’s quantitative easing program. 

Yet, the spending and borrowing and spending continue in Washington ad nauseam.