Sunday, September 5, 2021

Treasuries As Trash

 Bill Gross recently said that bonds may become trash and, as an old bond hound myself, I must sadly agree. His reasoning is very simple and common sense: 

1. The US is running enormous fiscal deficits, currently financed at least 60% by the Fed, ie it buys 60% of all Treasury bonds issued.

2. The Fed “prints” an equal number of dollars, thus increasing money supply - the “fuel” for inflation.

3. Inflation, predictably, is now at multi year highs = currently at 5.3% year over year.

4. Ten year Treasury bonds are yielding 1.3%, obviously due solely to the Fed’s constant massive buying. A bond investor is now “enjoying” a real, inflation adjusted return of negative 4%. That’s unprecedented, particularly if you see it as a ratio of the nominal yield, ie -4/1.3 - chart below.

5. The Fed is entrusted with keeping inflation low and safeguarding the value of the dollar.  It knows very well that “printing” $120 billion per month to monetize the governments deficits has the exact opposite effect and must soon stop. To be clear: the US is financing itself via the printing press. You know the fate of other economies that did the same, unthinkable as it may now seem for the US.

6.  Once the Fed scales back its bond buying, other buyers must step in. If the government does not rein in its deficit drastically to reduce new bond supply, who in his/her right mind will buy bonds yielding -4%? No one, absolutely no one.

7. Ok, maybe inflation will come back down to…. What? 1%? How likely is this without a serious economic and asset price crash? (Maybe that’s exactly what will happen, given the crazy valuations of everything.)

8. Let’s take a middle of the road scenario: the Fed cuts back bond purchases gradually, the government also reduces fiscal deficits and inflation goes back to 2%. Still and all, do you want to own bonds at 1.3%, ie at minus 0.7%? Nope, you would like a positive, say, 0.5% meaning around 2.5% nominal yield.

9. Compare 2.5% with 1.3% and figure out what your total return will be down the road if you buy or hold a 10 year treasury bond today… your mark to market will get massacred (the price of your bond will drop from 100 to around 90 in the secondary market)

10. All of the above explains why Bill Gross is calling bonds trash…and perhaps he’s being conservative, because if inflation stays significantly above 2%, say around 3-5%, bond prices will literally collapse.


  1. Perhaps the traditional way of thinking about the Fed is not right. The Fed is not asking how much does it need to print to prop up the market. The Fed is asking how much can it print before the markets revolt... which leads to a question of what inflation rate do they find acceptable?.... I am going with 10%; just a gut feel...

    But you are right... just because the printed money does not cause inflation now, does not mean the printed money will never cause inflation.... somehow, I feel that for the people in power, the long term is simply something that cannot be considered.... I feel that about China too... which leads to the question, how terrible is the hidden rot?

    1. The problem with revolutions is that they occur instantaneously, or at least they seem to, because those who cause it are deaf and blind to the underlying problems. “Let them eat cake”… should be a warning for all concerned.

      An enormous rise in money supply, aka “printed money”, cannot but create inflation. So far, it is obvious mostly in assets, like stocks and real estate. But, the rise in commodities, transportation and low-pay worker wages means it is already spilling over to the consumer side.

      As for the long term… truly no one cares any more, except for weirdos like you and me 😃