Bill Gross is warning investors away from longer-term debt as the credit market grows more volatile.
In a Financial Times op-ed on Wednesday, the PIMCO cofounder said government, mortgage and corporate credit now totals about $84 trillion. He argued that balance sheets have grown too lopsided and that the result is putting growth at risk.
'Too much debt can lead to too much risk and too much equity can lead to less earnings per share growth under certain underperforming productivity cycles,' Gross wrote. 'Move them both at the same pace consistent with industry standards and economic growth more than likely expands as well.'
Gross said federal debt has already hit peak levels for peacetime, now at 100% of GDP. He added that the AI sector's debt boom is an anomaly by historical standards.
His bottom line was blunt: 'don't own bonds,' with the exception of one-year Treasury bills, which he said are now at 4.55%.
He also cautioned that stock investors should be careful at record levels because higher yields over time will contract profit margins. He said the market should expect 'higher volatility in prices for the benchmark 10-year Treasury bonds.'
The warning carries weight because Gross built his reputation on bond investing at PIMCO, where he became known as the 'Bond King.' But the market he once dominated has changed. Central banks are no longer reliably buying and holding Treasury debt as they diversify reserves, while hedge funds have become bigger and faster-moving players.
A popular hedge fund strategy known as the basis trade has added another layer of leverage to the system. That trade profits from small price differences between Treasury bonds and Treasury futures, but it has also made the market more volatile.
Gross pointed to that shift as part of a broader warning for capital markets. Hedge funds' share of total Treasury holdings has almost doubled since 2023 to 8.5%, exceeding the portion held by depository institutions and mutual funds.
The new volatility has already shown up in yields. Ten-year Treasury yields have soared more than 100 basis points since the Iran war started and recently hit the highest levels in 24 years.
That matters because a market that is supposed to serve as a safe haven can become less reliable when leverage rises and liquidity disappears. Joe Maher, a markets economist at Capital Economics, said hedge funds could unwind positions in a risk-off move and force selling in other assets.
Gross said he is 'suspicious' of AI hyperscalers unless they have price-to-earnings ratios of less than 20. He also said Verizon and AT&T face pressure from SpaceX's Starlink. For income funds trading at a discount to net asset values, he said they may offer opportunities, but only if short-term rates do not rise higher than expected.
His closing advice was simple: 'Preserve and protect is my current investment motto.'
The market has already voted. When the cost of debt climbs and leverage gets crowded, capital does not reward complacency for long. Higher yields are not just a Wall Street problem; they are a tax on future growth, margins and the taxpayer alike.
