Bill Gross Says He’s Short Treasuries, Expecting 3%-4% Inflation

(Bloomberg) — Legendary bond investor Bill Gross said he’s short Treasuries and expects U.S. inflation to accelerate to a pace of 3% to 4% in coming months.

Gross sees price pressures picking up amid “substantial” fiscal stimulus, including the $1.9 trillion Covid-19 relief bill and a potential infrastructure package down the line, as well as “gangbusters” levels of household income, he said in a Bloomberg Television interview on Tuesday.

“There’s significant demand that is stored up, power that is stored up that can be unleashed if consumers want to go in that direction, and I think to a certain extent they will,” Gross said. “I see a 3% to 4% number ahead of us.”

Treasury yields have surged since January, fueled in part by expectations that fiscal stimulus and vaccinations will turbo-charge the recovery, causing inflation to take off. The 10-year breakeven inflation rate — a market proxy for inflation over the next decade — got to just under 2.31% on Tuesday, the highest since January 2014.

The market has also brought forward expectations for when the Federal Reserve, which is due to announce its next policy decision on Wednesday, will start tightening policy. Several Wall Street strategists have bumped up their forecasts for 10-year yields in response.

Fed Chair Jerome Powell has promised to look through spikes in inflation until the central bank determines its inflation and employment goals are met. However, “three to six to 12 months at 3% to 4% plus inflation will give him pause in terms of his current policy,” Gross said, even if Powell and the Fed’s dot plot “deny” the market’s expectation of a March 2023 liftoff.

Gross said he was shorting Treasuries when the selloff began several weeks ago, a slump that drove the 10-year yield to 1.64%, its highest level since February 2020. The investor, who used to manage the world’s biggest bond fund at Pacific Investment Management Co., continues to bet against 10-year futures and the long bond.

Given the influence of the 10-year rate on the housing market, Gross suspects the Fed will resume a “twist” policy of focusing its asset purchases in long-maturity Treasuries.

“Operation twist may be in our future, where the Fed is limited to, you know, perhaps a trillion or so in terms of outright spending, but they begin to spend more on 10s and 20s and 30s in order to keep those long term interest rates down,” he said.

Such a move may have already taken place in the last two weeks, Gross added, given that yields have come down from the highs reached amid the selloff.The money manager also said he made $10 million betting against shares of GameStop, the company at the center of a retail-trader-driven frenzy in January. Posters on Reddit’s WallStreetBets group specifically targeted short sellers of the stock, driving many other bears away.

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