Bill Gross on Bond Yields, Regional Banks, Opportunities

we've been talking a lot this week about the fight against inflation whether it has been slayed or at least if it's on its way to being slayed you can make a case economically speaking that we're on course for that but is there an investment case to be made right now around that well I I think there is a case for three percent inflation going forward plus or minus and I I think if we got to that point then the FED would begin to consider stopping and maybe even lowering rates over the next year or so but I I do think that the tenure at 4 15 now you know it is probably overvalued and has been overvalued for a long time in terms of a lower yield and too high a price you know if fed funds actually came down to two and a half or three percent you know the 10-year term premium that is the spread between 10 years in fed funds typically it's been about 135 basis points over a long period of time so you know if you had 135 basis points to two and a half or even three percent on fed funds you get to a point where we are now and that suggests that all of the Bulls on treasuries and on the tenure and maybe even on the long bun I think their arguments are a little misplaced I think it's been overvalued for a long time and we're going back to proper evaluation on longer term notes and bonds but I mean you understand better than anybody that relationship between what's going on with inflation and the fed and how that sort of factors into some of these bullish calls and those bull calls have really started to increase not just because of the two reports that we got this week Bill if they do have it wrong here kind of give us a sense here of why specifically foreign first of all because rates were so low because of quantitative easing and the fact that uh you know in some cases The Five-Year real yield was a minus uh 200 basis points which sounds incredible but it was a year and a half ago and it's now a plus 200 basis points so a 400 basis point switch in terms of real rates so I I think investors simply got overwhelmed with the fact that the FED would stay low and stay low for a long time and that inflation wouldn't uh pop its head out of the out of the rabbit hole it has and and so now we're moving back into a an old age world I suppose in which uh you know interest rates really are um are are a sign of a healthy economy and the way we have it now the negative yield curve and we've had that for 12 days 18 months I suppose you know a thriving economy a thriving finance-based economy can't do well doesn't mean it goes down in the dust but it can't do well if you know low risk Investments yield more than high risk Investments and as you march out from the you know the 30-day Bill to you know the 30-year Bond you can see that you are better off field wise in terms of the 30-year Bill had a 30-day Bill and so that's just a perverted yield curve and and it won't do well for the economy going forward well you make the point that higher rates are a sign of a healthy economy and I want to talk a little bit more about real yields because I was just going through the screens if you look at 30-year real yields they're knocking on the door of two percent we haven't been there for well over a decade what message do you take away from that this fantastic run-up that we've seen specifically in real yields well it it's a message that uh that the economy and inflation in particular um should be slowing down and has to slow down if inflation is to be contained it's a two percent real yield for I don't think it's that high for 30s but for fives and close to that for tens is that too high yeah it probably is on a longer term basis but you know it's been deemed necessary I guess to to keep inflation at this point at three to three and a half percent and will probably be necessary going forward real yields as Paul volcker showed us you know are the um are this or the solution to slower economic growth to lower inflation and I think both I think you know the current uh chairman Powell is um is trying to replicate what Paul volcker did he just to slay the inflation Dragon not in the same way and not to the same magnitude that volcker had to do but he's trying to be the the volcker number two going forward um you know 12 to 24 months in the future Phil I promise you I'm looking at the 30-year real yield right now at 1.95 I'll be you the chart later but it is really high it's been shocking I want to go back to nominal yields though and talk about fair value because I follow your Twitter pretty closely and of course you tweeted last week that your overall bearish on 10-year yields we've talked about how you look at the tenure right now it's at uh about let's see 4.16 where is fair value at what level would you get comfortable stepping into duration here well I think at higher levels around uh four and a half is a good technical stopping point um you know what we've seen this week Katie in in terms of Supply we've seen 100 billion in Supply you mentioned that um 3 10 and 30 are bonds the first two auctions went well the 30-year did not but we can expect I think going forward based upon the fiscal situation and a trillion and a half dollar deficit to see a Supply in terms of longer dated treasuries of maybe a trillion more than we saw in the previous 12 months so it it's Supply and addition to the fact in my view that the 10-year you know began the year at a much too low level I I would point out too that other markets the Boon Market in Germany and the guilt Market in the UK they're all at uh basically cyclical highs and show signs at the moment of breaking into higher territory so this is a global phenomena we know uh something about Japan we don't know exactly what their intentions are but it seems all major central banks are moving in the same direction in all major Bond markets are moving that way too so I I think the 10-year treasury of four and a half percent might be some might be some value but uh but Bill is certainly not at this at this level but Bill when we look at sort of I guess what real rates are telling us and you put that I guess against the backdrop of the increase in treasury Supply what most people expect to increase further and of course the potential for additional fiscal money coming through the pipeline does that distort the message that we're getting I think to some extent I mean like I suggested the the real yields uh that's sorry Katie on the 30 year I guess you're more right than I am in terms of being close to two percent so they're all close to two percent historically you know those levels have been enough have been enough to bring down uh in inflation they were higher than that during the volcker period although it was harder to measure it because it didn't have tips but um you know two percent real um is is a is a substantially restrictive uh rate and I I think once uh you know this 500 billion or 1 trillion [Music] Push by consumers resulting from the uh three or four trillion dollar fiscal program of 12 to 18 months ago I think once that's used up that we're going to start to see the effect of a 2 percent real rate on consumers and consumption going forward therefore lower wheel GDP and therefore inflation in my view around three percent you've gotten out of a lot of your Regional Bank holdings you tweeted last month you made quote mucho bucks you tweeted something uh earlier that I thought was really interesting you were connecting it to what we're seeing in the treasury market saying that you find it odd that the high 30-year treasury yields that took down svb and most other regionals due to the excess duration are just as high or higher now did the past few months allow regionals to reduce duration what do you mean by that were you being basically making the point that we could see more trouble ahead for some of these smaller Banks well it's it's hard to know Katie I I we do know that the Silicon Valley Bank was taken down because of long-term treasuries they took risk but they took it uh on the duration side as opposed to the credit side um and during the time of many Panic two months ago uh you know firms like Schwab and so on which were identified with having held a longer term portfolio but they were taken down rather abruptly as well I find it odd now that 30-year treasuries are at a higher yield than they were when this mini panic occurred that uh you know that the duration effect isn't having an effect on the regional Banks it doesn't mean that you know during this period of time that many of them have taken measures to reduce duration I don't know that the statistics are not current enough but you know it's certainly odd that they've come back up 10 20 30 percent on the the long Bond and the long treasury yield is higher than what it was before and so their uh their assets to the extent that they own longer derision assets treasuries perhaps you know have gone down in price and their their Book value has probably been affected but I'm not sure in terms of the totality whether or not the Regionals have reduced duration but if they haven't then right there could be problems bill is it odd enough that you would bet against some of these Regional Bank stocks or simply not touch them well I haven't been against them I I just eliminated them from my portfolio I I wrote an investment Outlook about two months ago that said I always wanted to own a bank because it's a license to make money um at uh Book value if it's created um you know in a in a new fashion there was a chance uh two months ago where you could buy a a decent bank at uh 50 percent of Book value and so it was on sale by half during that time so um I I think at this point uh not having been an expert on banks themselves but but being experienced I guess over 30 or 40 years in terms of financial paying X and this was a mini uh Panic that it just seemed like an overreach in terms of a downside and that there was value not at one times Book value but at a 0.5 percent and Book value and so so I bought a lot of them but now as I mentioned with long bond yields moving higher as opposed to lower and uh with most of the Regionals going up 30 or 40 percent you know it's it's just time to look elsewhere and that's what I'm doing well let's talk about that I mean what where are you looking I mean what what what's your appetite right now well it's mainly in our related Investments I I have a pretty good position in Activision which is the Microsoft acquisition which may or may not but it looks good uh in the next two to three weeks at 95 and the stocks just below 92 so I I think that's a good value and the best value um that I I think out there Romaine is um you know in the MLPs the pipelines that are Partnerships first of all they're tax deferred and second of all they yield eight to eight and a half percent and participates yes when oil prices go up and you know if oil prices went back down there correlated to some extent but these are investments that are very attractive especially one Magellan uh which is a symbol MMP it's selling it as 6 percent discount to its acquirer which is okay and uh you know that could take place in uh one to two months and so these are these have been my major money makers in addition to the Regionals is that primarily though looking for cash flow or is there a growth story there as well well I think so uh you know I'm 79 and so the portfolios reflect the fact that cash flow is important uh it's not that I'm dissing uh Nvidia um although I I did a week or two weeks ago but um you know at eight to eight and a half percent tax deferred that's really an equivalent yield of about 11 or 12 percent when you put a pencil to it and so uh you know that to me is an excellent excellent return you know the stock market itself you haven't asked this question but uh let me get into it the equity risk premium as pointed out by The Economist just last night their weekly Edition the equity risk premium which is the difference between um between the equity it's the p e ratio upside down so if the PE is 20 it's a five percent uh premium relative to the tenure um right now it's less than one percent uh which is almost historically low it means investors are willing to take Equity risk uh relative to a 10-year treasury which in my view is overvalued itself and so um you know the the market the stock market I think is is overvalued based upon those terms and and uh other terms as well when you look at though what kind of led us to these valuations bill I mean there were a lot of people that talked about this idea I mean you mentioned Nvidia and AI the idea that there was some sort of new structural growth story if you will that AI would make us more productive and in turn that would lead to better profits better profit margins here do you not see any validity to that thesis no I do wrong I I didn't mention that and thanks for pointing that out I'm not sure I'm not an expert and hey I although I I have one here in my uh pocket phone um but it seems to me yes that the consensus seems to be that AI will affect profits in many areas not just in in chips and so uh if that's the case uh then the stock market has a a fundamental Foundation going forward uh we'll we'll have to see on that but uh you know aside from that uh you know I simply think that based on the low Equity risk premium and relatively High p e ratios that uh you know the Market's overvalued let me point this out but um real interest rates are real interest rates are really important over a longer term basis in terms of stock valuations and as we've mentioned before the five-year real uh interest rate has gone from a minus 200 to a plus 200. that means that the five-year tip has gone down by uh 16 and the 10-year tips gone down by 20 and you know had things been copacetic and and not not changed had we not seen AI had we not experienced the momentum flush here in the last six months then you know these interest rates over a longer term basis would would be bound to affect the stock market levels because they've they themselves have gone down by 20 to 25 percent well Bill I'm glad you brought us there because that's something I've been wondering I remember back in 2020 2021 when interest rates were real interest rates at those deeply negative levels I wrote a lot of stories to the effect of when this goes back to positive territory in a meaningful way that'll be bad news for stocks obviously we haven't seen that do you think that that Dynamic is just delayed or has something fundamentally changed in that relationship no I I think it's delayed Kitty and it's hard to know because uh real interest rates work with a lag it's not a day-to-day type of basis it could be a one to two to three year type of leg basis and and both of you bought out the fact that uh that Ai and momentum and uh you know a good earnings season for stocks in the last 12 to 24 months based upon fiscal policy that will not be repeated in in my opinion relative to what we've seen in the past at three to four trillion dollar deficits and so I absent this I think going forward if an investor is a long-term investor you want to be very careful in terms of valuations here on stocks despite Ai and despite the momentum going forward it it's clearly an unusual uh spread and an unusual effect that hasn't taken place going forward

Channel: Bloomberg Television

Views: 42,991

Keywords: Bloomberg

Id: daUfGn74ogU

Length: 19min 0sec (1140 seconds)

Published: Fri Aug 11 2023

Reddit Comments

[u/firesafaris]

Where are they getting the 2% real yield from? What’s the math on that?

[u/firesafaris]

There it is. 10 yr at 4.5%. Makes sense to me.

[u/Powderfinger60]

Is QT still going? What is the rate of QT? At some point a year ago or so I read or heard it was $95 billion per month. How much of QT is just not purchasing replacement bonds & how much of it is actual selling? They still hold mortgages from the 2008 era right? I don’t know how to find this information is it all on their website somewhere? What if any effect does QT have on rates anywhere on the curve currently or going forward?