(Bloomberg) — Bill Gross, the one-time bond king, said stock and bond bulls are wrong, as both markets are “overvalued.”
The former chief investment officer of Pacific Investment Management Co., speaking in an interview on Bloomberg Television, said the fair value of the 10-year Treasury yield is about 4.5%, compared with the current level of around 4.16%.
Gross, who retired from asset management in 2019, said inflation may prove sticky at around 3%. He pointed out that 10-year yields historically traded about 135 basis points above the Federal Reserve’s policy rate.
So even if the Fed lowers interest rates to about 3%, the current 10-year yield remains too low, given the historical relationship. In addition, the skyrocketing government deficit will add supply pressure on the bond market, he said, reiterating his view outlined in his recent investment outlook.
“All of the bulls on Treasuries,” said Gross, “I’d like to think their arguments are a little misplaced.”
As for the stock market, Gross said the equity risk premium – measured by the difference between the earnings yields and bond yields, are at historical lows, suggesting that stocks are too expensive.
Gross reiterated that he has sold out his holdings of regional banks, after the recent rally. At the moment, the asset with the “best value” is energy pipeline partnerships, which offers attractive yields and tax advantages, he said.
(Updates to include additional details throughout.)