Bill Gross Favors German Bonds Amid Rising Yields

Key Takeaway

• Bill Gross sees European bonds as more attractive than U.S. Treasuries due to rising yields and political shifts, with German bund yields up 40 basis points this quarter.
• Recent European elections have increased market volatility and bond yields, potentially foreshadowing similar impacts from the upcoming U.S. election on Treasuries.
• Gross favors investments in pipeline master limited partnerships like Energy Transfer LP, regional banks such as KeyCorp, and tech stocks including Microsoft for AI exposure.

European Bond Yields Rise

Bill Gross, co-founder and former chief investment officer of Pacific Investment Management Co., has expressed optimism about European bonds, noting that recent increases in yields make them appear "more attractive" than U.S. Treasuries. Yields in Germany, France, and Italy have all climbed around 40 basis points this quarter. From the start of the year, euro-area bonds have experienced even more significant increases in yields.

The yield on the 10-year German bund, for instance, dropped by 80 basis points in the final quarter of 2023 as traders anticipated policy loosening from the European Central Bank (ECB). However, the ECB's stance has shifted, with officials, including President Christine Lagarde, pushing back against the notion of successive rate cuts. This change in policy outlook has contributed to the recent rise in yields.

Gross highlighted the narrowing spreads between German and French 10-year bonds relative to Treasuries over the past month or two. "There’s coming a point where European bonds are more attractive than Treasury bonds," Gross said. He also pointed out that the recent election results in Europe, which saw surprise defeats for France's Emmanuel Macron and Germany's Olaf Scholz, have contributed to market volatility and higher yields.

Election Impact on Markets

The recent European Parliament elections resulted in significant political shifts, with far-right parties gaining ground. This has led to increased market uncertainty and higher bond yields. French bond yields, for example, rose by more than 12 basis points to 3.23%, the highest level since November. German and Italian bonds also experienced sell-offs.

Gross noted that the election results in Europe, as well as earlier elections in Mexico, India, and South Africa, where surprise outcomes disrupted markets, could serve as a guide for how the upcoming U.S. election might impact global assets. "What we’ve seen last night and what we’ve seen the last few weeks is a reaction to uncertainty, in terms of not only the party that’s dominating, but uncertainty as to what their policies will be," Gross said.

He added that as the U.S. election approaches, the uncertainty and potential policy implications could significantly impact Treasuries. "As we move to November, and something becomes more clear as to who might or who might not win, the uncertainty plus the potential policy implications could impact Treasuries significantly," Gross explained.

Investment Opportunities

Despite the current market volatility, Gross sees opportunities in specific sectors. He reiterated his preference for pipeline master limited partnerships, including Energy Transfer LP and Western Midstream Partners LP. Gross also finds some regional bank stocks attractive, such as KeyCorp, Truist Financial Corp., and Citizens Financial Group Inc.

In addition to these sectors, Gross is optimistic about certain technology and utility stocks. He owns Microsoft as an artificial intelligence play and NextEra Energy, a utility company. Gross's investment strategy reflects his belief in the potential of these sectors to perform well despite broader market uncertainties.

Street Views

• Bill Gross (Cautiously Optimistic on European bonds):

  "The recent increase in yields on European bonds is making them look more attractive than Treasuries."