Bill Gross - known as the "king of bonds" - has recently dropped a bombshell, or in this case, a bond sell.
The Financial Times reports that: "The Janus Henderson manager said the $2.2bn Global Unconstrained Bond Fund has taken a short position on Treasuries, UK gilts and German Bunds. Mr Gross, the so-called bond king, said he left the Japanese government bond market alone."
"Mr Gross pointed to a report from Bloomberg that China plans to either slow or halt its purchases of Treasuries for one reason behind his negative view."
CNBC completes the rational for Gross' bearish bond stance: "Rising nominal U.S. GDP that will stoke inflation, reduced purchases from global central banks, and higher budget deficits in the US."
True that and perfectly rational, particularly given the previous day's commotion over the Bank of Japan's (BOJ) announcement that it's trimming its purchases of 10 to 25-year and 25 to 40-year JGBs by ¥10 billion each. And then, there's the European Central Bank (ECB) which is scheduled to halve its asset purchases from €60 billion to €30 billion starting this month.
But if the World Bank's (WB) recently-released 'Global Economic Prospects' report turns out correct, Bill would turn out wrong...again. Bill was still head honcho at PIMCO (in 2011) when he decided in March of that year to exit the US Treasury market completely, expecting interest rates there to climb on expectations that the Fed would end QE2 by the middle of the year.
Yet Bill was correct, the Fed ended QE2 in June 2011. However renewed weakness in the economy forced the US central bank into implementing "Operation Twist" only three-months later, followed by QE3 in September 2012 - sending US 10-year bond yields from a March 2011 high of 3.57% to 1.76% by the end of 2012. Yields are currently around 2.5%.
But I digress. The heading of the World Bank's latest global outlook report says it all "Broad-Based Upturn-Will It Last?"
Although the current growth projections have been revised higher from the one it made in June 2017, what is noticeable is the slowing in the GDP growth forecasts among advanced economies.
The World Bank sees growth in the advanced economies as a whole slowing from 2.3% in 2017 to 2.2% next year, 1.9% in 2019 and 1.7% in 2020. It estimates the US economy advancing from 2.3% last year to 2.5% in 2018 before slowing to 2.2% in 2019 and 2% in 2020; the Eurozone from 2.4% in 2017 to 2.1% this year to 1.7% in 2019 and 1.5% in 2020; and Japan from 1.7% to 1.3% to 0.8% to 0.5%, respectively. These are the economies whose central banks have enacted mammoth asset purchases and are expected to continue to withdraw or start withdrawing asset purchases.
The problem here is as the WB rightfully observed: "Despite the strengthening of activity, inflation in advanced economies remained subdued in 2017," which could compound Bill's problem with his latest bet.
Not only would below-target inflation persuade central banks to go slow on stimulus reduction but the mere sluggishness in inflation is a positive for the bond market.
There's that. And then there's also the central bank's counter-measures should bond yields continue to rise amid low inflation - knowing that it had worked in the past, central banks would have no misgiving about reinstating bond buying.
Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a portfolio manager and central banker before joining Rainmaker. Check out his economics analysis here.