Buffett and Gross agree: slump in 30-year bonds makes good sense

[NEW YORK] Warren Buffett and Bill Gross signaled the end is at hand for Treasury market bulls as 30-year bond yields rose to a four-month high.

Longer-maturity Treasuries led losses after Buffett, the billionaire chairman of Berkshire Hathaway Inc, said long-term bonds are overvalued. Touting bearish bets after yields climbed last week by the most in almost two months, Gross said the bull market "supercycle" for both bonds and stocks is ending.

The calls for an end to bond rally come amid concern that gains triggered by unprecedented European Central Bank bond purchases were overdone. German 10-year yields, which recently hit record lows, reached the highest level since January.

"The markets have been under pressure," said Sean Murphy, a trader at Societe General SA in New York, one of the 22 primary dealers that trade with the Federal Reserve.

The 30-year bond yield rose five basis points, or 0.05 percentage point, to 2.88 per cent at 5 pm New York time. The price of the 2.5 per cent security maturing in February 2045 fell 30/32, or US$9.38 per US$1,000 face amount, to 92 1/2, according to Bloomberg Bond Trader prices. The yield reached the highest level since Dec. 24.

Benchmark 10-year yields rose 21 basis points last week, nearly matching the 22 basis point move in German bunds of comparable maturity, the most since January 2013.

Mr Buffett reiterated his belief that it's not worth buying long-term bonds at current interest rates. In an interview Monday on CNBC, he said he expects the value of the securities to fall.

"Credit-based oxygen is running out," Mr Gross wrote an investment outlook, titled "A Sense of an Ending," in which he compared the final stages of the market cycle with his own mortality. "I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang."

MrGross, the manager of the US$1.5 billion Janus Global Unconstrained Bond Fund, acknowledged that his calls for the end of the bond rally in both February and April of 2013 were too early. He was chief investment officer at Pacific Investment Management Co. until his sudden departure in September.

The US payrolls report on May 8 is forecast to show the US economy added 230,000 jobs last month after a smaller-than- expected 126,000 increase in March - the worst result since December 2013.

"The most important thing is to watch is wages, which a lot of people are talking about," said Dan Mulholland, a trader at Credit Agricole SA in New York. "We think the labour market hasn't really skipped a beat." The gap between yields on Treasuries maturing in five- and 30-years, known as the yield curve, widened to 1.37 percentage points, the most since December.

"It wouldn't surprise me to see that curve sell off and steepen, and we'll probably do a little of that here," Mr Mulholland said.

US debt fell after data, including the University of Michigan consumer confidence on May 1, showed a rebound in economic sentiment and activity. That followed a series of weak first-quarter economic readings that the Fed blamed on "transitory" factors including brutal winter weather in much of the US.

Most economists project the US central bank will wait until at least September before raising rates from near zero, according to the latest Bloomberg survey, after earlier projecting a June liftoff.

BLOOMBERG