Forget oil, forget Dow Jones records, the most important measure for investors to watch in 2017 is whether 10-year treasury yields stray into secular bond bear territory, Bill Gross has said.
In his first Investment Outlook of the year, the Janus Capital bond manager said markets would be focused on whether treasuries are ‘over-yielded’ and risk markets are overpriced in 2017.
Gross – who reiterated his scepticism over Donald Trump’s ability to stimulate growth – said he is expecting a temporary acceleration of growth under the new US regime but questions over interest rates will not go away.
All this, he said, has a huge bearing on the future of US treasuries, which are now subject to ‘artificial pricing’ due to the influence of monetary policy measures in Europe, Japan and also the performance of German bunds.
‘So for 10-year Treasuries, a multiple of influences obscure a rational conclusion that yields must inevitably move higher during Trump's first year in office,’ he said.
‘When the fundamentals are confusing, however, technical indicators may come to the rescue and it's there where a super three decade downward sloping trend line for 10-year yields could be critical.
‘It's obvious to most observers that 10-year yields have been moving downward since their secular peak in the early 1980s, and at a rather linear rate. 30 basis point declines on average for the past 30 years have lowered the 10-year from 10% in 1987 to the current 2.40%.’
However, Gross said this ‘super strong’ downward trend line is now being tested at its upper limit and if the range of 2.55%-2.60% yield on 10-year treasuries is broken then the market dynamics could change substantially.
‘This is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun. Watch the 2.6% level.
‘Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the dollar/euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017,’ he said.
To read Bill Gross’s latest missive in its entirety, entitled Echoes from Africa, please click here.