In recent weeks, there has been a major outflow out of fixed income ETFs, following the breakout in long-term yields to their highest levels since 2007. According to Bill Gross, the co-founder and former CIO of PIMCO, retail ETF investors are reducing their holdings and contributing to volatility. 

He commented in a CNBC interview that “Over the last few days, large bond ETFs that number in the $100bn range, are experiencing higher volume, which indicates small investor vigilantes are selling. They have been spooked over the last week or so by declines of 3%, 4% and 5% in their bond ETFs.”

In terms of the bigger picture, he attributes the weakness in fixed income due to the federal government’s $2 trillion deficit and the large amounts of incoming supply necessary to finance it. Another contributing factor is the Federal Reserve’s quantitative tightening program which is also adding to supply. Ultimately, he sees yields on 10-year Treasuries reaching as high as 5%.  

He believes the Fed is done hiking this cycle. However, he doesn’t see much upside for long-duration fixed income even if the Fed starts cutting rates due to sticky inflation, nearly 30% of Treasury supply maturing in the next couple of years, and structurally high deficits. 

Finsum: Bill Gross shared some thoughts on the bond market and how recent fixed income ETF outflows are contributing to volatility.