Bond Guru Says Risks Are Rising

Bond market guru Bill Gross on Monday again warned investors that long-term bonds may be a poor investment for the foreseeable future.

Gross, a managing director at $250-billion-asset Pacific Investment Management Co. in Newport Beach, said on CNBC that he believes the U.S. inflation rate could double to more than 3% as the economy rebounds.

He wasn’t specific about how soon inflation might revive, but Gross said he is already positioning Pimco’s bond portfolios accordingly, moving assets out of longer-term securities and into shorter-term ones.

If inflation rises, pulling interest rates in general higher, longer-term bonds probably would suffer the biggest declines in value, Gross noted. Bond prices move in the opposite direction of market interest rates. “We want to be invested in shorter pieces of paper because they have less price risk,” Gross said.

Long-term Treasury bond yields bottomed in November, when the 10-year T-note yield fell to 4.2%. The yield on that security rose to 5.22% Monday from 5.12% Friday, fueled in part by Gross’ comments. On Dec. 31 the yield was at 5.05%, and it rose as high as 5.43% in April.

Even though government and corporate bond yields have inched up this year--the exception being yields on corporate junk bonds, which have fallen--investors in bond mutual funds are mostly enjoying positive “total” returns of between 1.5% and 3% year to date. That’s because interest earnings are more than compensating for any decline in bond values.

But Gross is warning that investors in longer-term bond funds could see red if market rates surge with inflation.