Bill Gross, the co-founder of PIMCO and now the manager of Janus Global Unconstrained Bond Fund, is increasingly bearish on the outlook for bond markets. In part, that's because the US Federal Reserve is likely to start hiking rates this month. The Fed still has some flexibility "there's no significant inflation", he tells Bloomberg.com. But if it's too slow in raising rates "then ultimately five, ten, 15 years down the road, savings, investment and the economy... suffer".
This is likely to be bad news for corporate bonds, which have rallied strongly in recent months. Central-bank actions, such as quantitative easing and negative interest rates, have pushed bond values up to artificially high levels a state of affairs that he likens to a "Ponzi scheme".
However, he believes that central banks won't be able to keep the bubble inflated indefinitely, and the Fed's moves to tighten policy could be a tipping point. Other catalysts that could hurt the credit markets are a further slowdown in China, Britain voting to leave the EU, or an escalation of problems in Greece and Brazil.
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Hence Gross is not only reducing his exposure to riskier bonds, but actively considering shorting corporate bonds something that he describes as going against the habit of a lifetime. "It's really hard to change your psychological make-up and to be a hedge manager who is comfortable with being short," he says.
That's because up until now "markets have always snapped back" and taking more risk "has always been validated going forward". However, right now "the system itself is at risk", implying that what happens in markets over the next few years could be very different to what investors have come to expect.
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