Bill Gross Is Wrong About Bond ETFs

Bill Gross has more experience with the bond market than almost anyone. He co-founded Pacific Investment Management Co. over 50 years ago, and he managed the PIMCO Total Return Fund—once the largest bond fund in the world—for much of his time at the firm. He’s seen it all!  

And though he doesn’t manage money professionally anymore, Gross is still very much a financial market enthusiast. He’s active on X (formerly Twitter), and he’s a common sight in financial media. 

Last week, Gross sat down for an interview with Bloomberg Television and said a few interesting things about the bond market. 

Gross explained that if over the medium to long term the Federal Reserve's benchmark fed-funds rate settles around 3% to 3.5%, then a 5% yield on the 10-year Treasury is “decent value.” 

Gross said that such a yield would be normal under the assumption that the term premium—or the extra return that investors demand for taking the risk of buying longer-term bonds—is around 1% to 1.25%. 

There are a lot of assumptions embedded in Gross’ view, but it’s a reasonable take.   

Gross Is Off on ETF Blame 

Something else Gross said, however, was way off the mark. Gross blamed the recent sell-off in long-term bonds on big government deficits, quantitative tightening by the Fed and a growing belief in “higher-for-longer” interest rates. But he also blamed it on ETF investors.  

“What I’ve seen in the last week is that the bond vigilantes—to the extent that they are now individuals owning hundreds of billions of bond ETFs—they’ve been spooked over the last week or so by declines of 2-5% in their ETFs. And so, I think they’re joining the crowd in terms of selling.” 

While a plausible-sounding explanation for the bond sell-off, the data just doesn’t support Gross’ assertion.  

Investors haven’t been big sellers of bond exchange-traded funds in recent days; they’ve actually been net buyers! Over the past week, $4 billion has flowed into U.S.-listed fixed-income ETFs. 

Sure, a lot of those inflows were for short-term bond ETFs, like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the iShares Short Treasury Bond ETF (SHV). 

But even funds like the iShares US Treasury Bond ETF (GOVT) and the Schwab Long-Term U.S. Treasury ETF (SCHQ) picked up cash. 

The one fund that everyone is hyper-focused on, the iShares 20+ Year Treasury Bond ETF (TLT), the big dog among long-term bond ETFs, did see outflows—but only to the tune of $160 million, a fraction of the more than $17 billion that has entered the fund this year.  

In other words, there’s no deluge of selling in bond exchange-traded funds. So unlike Gross, I wouldn’t attribute the recent spike in yields to ETF bond vigilantes.  

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