Greenspan Warns Bond Rally Untenable as Bill Gross Says Go Long

(Bloomberg) -- A day after Bill Gross said central-bank support limits the downside for long-term government debt, former Federal Reserve Chairman Alan Greenspan called the bull market in Treasuries unsustainable.

The yield on the U.S. 10-year note fell to the lowest level in two weeks even as Greenspan warned it may rise in the long run to as much as 5 percent. On Wednesday, the Fed lowered projections for the path of interest rates, while the Bank of Japan shifted the focus of its stimulus to controlling bond yields. The actions prompted Gross, manager of the $1.54 billion Janus Global Unconstrained Bond Fund, to say he favors longer-dated sovereign debt.

"Whenever you have a bull market, it looks as though it is never going to turn," Greenspan, the second-longest serving Fed chairman, said in an interview on Bloomberg Television. "This is a classic case of a peak in a speculative security."

Investors globally have regarded monetary policy with growing skepticism that there’s more central banks can do to stoke inflation and economic growth. Asset-purchase programs and negative interest rates have pushed yields on more than $9 trillion of government securities worldwide below zero, according to Bloomberg Barclays index data. The European Central Bank triggered a global selloff this month after signaling it wouldn’t pursue further stimulus.

The yield on the U.S. 10-year note fell three basis points, or 0.03 percentage point, to 1.62 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 was 98 29/32. 

Rate Path

The yield will climb to 1.72 percent by year-end, according to the weighted average in a Bloomberg survey of analysts that places a greater emphasis on most-recent projections.

The Fed on Wednesday held off on raising interest rates, indicating a hike later this year is likely while lowering projections for 2017 and beyond.

The probability of a move this year is about 58 percent, according to futures data compiled by Bloomberg. That’s based on the assumption that the effective fed funds rate will trade at the middle of the new Federal Open Market Committee target range after the next increase. Still, the tightening cycle is poised to be the slowest and shallowest in recent history, based on the market for overnight index swaps, which reflect expectations for the fed funds effective rate.

Yield Curve

The difference between Treasury two- and 30-year yields fell for a fifth day, declining to about 1.56 percentage points. That gap, a gauge of the yield curve, has flattened over the past year as traders bet the Fed would increase short-term rates, curbing the long-term outlook for inflation and economic growth.

An $11 billion auction of 10-year Treasury Inflation Protected Securities saw strong demand from investors Thursday, with the highest bid-to-cover ratio at a sale of the securities since May 2014.

Gross on Wednesday said he was extending duration by buying longer-term debt amid persistent signs of slow economic growth globally and subdued inflation. Longer maturities have a higher duration, meaning they gain more in price when interest rates decline.

“The timing of a bond bear market has certainly been delayed,” Gross said in an interview on Bloomberg Television. The BOJ’s plan “provides what I call a soft cap on Treasuries and on gilts and on bunds,” and signals limited downside in terms of price. “You can’t fight central banks.”

To contact the reporters on this story: Rebecca Spalding in New York at rspalding@bloomberg.net, Brian Chappatta in New York at bchappatta1@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Michael Aneiro