Bill "Bond King" Gross, who built his reputation by turning a boring corner of fixed income into an active-trading powerhouse at PIMCO, is now telling investors to steer clear of the same asset class that made him famous.
In a Financial Times op-ed, Gross warned that government, mortgage and corporate credit has grown to about $84 trillion, according to Federal Reserve data. He called the resulting credit landscape dangerously unbalanced.
Net federal debt has reached roughly 100% of gross domestic product, a peacetime record, and he described the artificial intelligence sector's borrowing binge as a historical anomaly.
"In such an environment, my view is: don't own bonds, with the exception of one-year Treasury bills, which are now at 4.55%," Gross wrote. "Be prepared for the end of 'what you are used to' stock markets and higher volatility in prices for the benchmark 10-year Treasury bonds."
The 10-year yield has jumped more than 100 basis points since the Iran conflict began and touched 5.34% on Oct. 1 – the highest in 24 years.
That rate shock hits broad benchmark funds such as the iShares Core U.S. Aggregate Bond ETF (NYSE: AGG) and the Vanguard Total Bond Market ETF (NASDAQ: BND).
Shifting Buyers, Basis Trades and Duration Risk
The traditional buyers of long-dated Treasuries are pulling back. Foreign central banks are diversifying their reserves. Pension funds are moving into private credit, with institutions putting close to $300 billion into private credit vehicles in 2025, according to Mercer.
Japan, the largest foreign holder of Treasuries, sold a net 3 trillion yen ($18.7 billion) of overseas debt through Aug. 22 after its 10-year yield rose above 3% for the first time since 1996.
"The story is not large-scale repatriation, but Japan gradually ceasing to be the marginal buyer of foreign bonds," said Masahiko Loo, senior fixed income strategist at State Street Investment Management. "Less incremental demand from one of the world's largest pools of savings is helping push term premium higher globally."
Price-sensitive hedge funds have filled much of the gap. Driven by the basis trade, which profits from small price gaps between cash Treasuries and futures, their share of Treasury holdings has nearly doubled since 2023 to 8.5%.
Leveraged basis positions alone total about $830 billion, forming a far different risk profile than the typical unlevered long-only institutional holder.
"In a risk-off environment, safe-haven flows into sovereign bonds may be offset by hedge funds unwinding their leveraged trading positions as funding conditions tighten," Joe Maher, an economist at Capital Economics, wrote in August. He added that an equity selloff could force those funds to dump bonds, spreading stress across asset classes.
As term premiums reset, long-duration funds such as the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) and the iShares 7-10 Year Treasury Bond ETF (NASDAQ: IEF) could see more price swings.
The 'Preserve and Protect' Playbook
Gross's answer is to move to the short end. He named one-year bills at 4.55% as the main refuge. For investors using funds, the closest match is ultra-short cash proxies like the SPDR Bloomberg 1-3 Month T-Bill ETF (NYSE: BIL) and the iShares 0-3 Month Treasury Bond ETF (NYSE: SGOV).
He is also cautious on stocks, warning that "higher yields over time will contract profit margins," explaining that AI hyperscalers trade at above 20 times earnings but naming Alphabet Inc. (NASDAQ: GOOG) as an exception- at about 17 times.
"Preserve and protect is my current investment motto," Gross concluded.
This article reflects the opinions of the author, not MarketDash. It's for informational purposes only and isn't financial or investment advice. Please do your own research and consult a professional before making investment decisions.
