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The bond market is going through its biggest turmoil in modern times as investors battle numerous concerns about the American economy. The 30-year treasury yield jumped to 5% on Wednesday, the highest level since 2007.
Similarly, the 10-year yield has jumped to 4.7%. Bond prices and yields move in opposite directions. As such, higher yields is a sign that investors are dumping bonds. Indeed, the price of the 30-year bond crashed to a low of $111 on Wednesday, lower than the pandemic high of $200.
VGLT and TLT ETs
Bill Gross notes three reasons
In an interview with CNBC, Bill Gross, the respected founder of PIMCO identified three main reasons why bonds are in a steep freefall. First, he noted that the supply of bonds has skyrocketed in the past few years, helped by the rising government deficit.
Data shows that the American public debt has jumped to over $33.4 trillion. It has soared by over $400 billion in the past few weeks and the trend will continue. Worse, the chances of this borrowing ending are limited since Congress passed the Fiscal Responsibility Act (FRA) that suspended the debt ceiling until 2025.
Ironically, this soaring debt is happening at a time when many large holders are dumping their holdings and the Fed is implementing quantitative tightening (QT). China has reduced its holdings of US debt to over $800 billion, the lowest level since 2009.
As China’s economy slows down, there is a likelihood that the government will continue exiting its US bond market. Saudi Arabia, another big holder of US debt is also slashing its holdings as it boosts local spending.
Watch here: https://www.youtube.com/embed/V2NCZyiGeZk?feature=oembedFederal Reserve and retail traders
Bill Gross also identified the Fed as a key driver for the bond market woes. The Fed, which misled the country on inflation, has hinted that it will continue hiking interest rates in the coming months. It sees rates peaking at between 5.50% and 5.75%, the highest level in decades. It also plans to continue its quantitative tightening policy.
Finally, Bill Gross pointed to the actions of retail traders who are focused on long-term bonds. Specifically, he noted the iShares 20+ Year Treasury Bond (TLT) and the Vanguard Long-Term Treasury ETF (VGLT), which have seen huge volumes recently. The two funds have crashed to their lowest levels since 2014.
Other investors have cited other reasons for the bond sell-off. Bill Ackman, the CEO of Pershing Square Holdings, cited the soaring energy prices, long-term deflationary effects of outsourcing production to China, and the ongoing strikes in the US. He believes that all these are inflationary, which will leave rates higher for longer.
The post VGLT, TLT: Billionaire Bill Gross explains the ongoing bond rout appeared first on Invezz
