Bill Gross says the surging 10-year Treasury yield could test 5% in the short term

Lucy Nicholson | Reuters

Widely followed investor Bill Gross believes Treasury yields have the potential to shoot even higher in the short run.

"I think we're going to go to 5[%]," Gross said on CNBC's "Last Call" on Tuesday, referring to the 10-year Treasury yield. "The market certainly is oversold at the moment in anticipation of Treasury supplies, in anticipation of higher for longer in terms of the Fed."

The stock market suffered a severe sell-off Tuesday as surging bond yields rattled Wall Street. The S&P 500 dropped 1.4%, touching its lowest level since June during the day as the 10-year Treasury yield reached its highest point in 16 years.

The benchmark yield has surged in the past month to touch 4.8% as the Federal Reserve pledged to keep interest rates at a higher level for longer. The 30-year Treasury yield hit 4.9% Tuesday, also the highest since 2007.

"I think maybe 5% caps it for the near term. It depends, of course, on inflation, depends on economic growth," the former chief investment officer and co-founder of Pimco said.

Billionaire investor Ray Dalio also said Tuesday that the surging 10-year rate could test 5% as he sees hotter inflation for longer.

Gross, once known as the bond king, believes that the Fed's aggressive rate hikes undertaken since March 2022 have had a significant effect on the yield curve. The central bank has taken interest rates to the highest level since early 2001.

Gross said investors are now grappling with the negative impact that comes from a deepening Treasury deficit.

"What we're seeing is a recognition of the Treasury deficit that is $2 trillion-plus, and that's affecting the long end, as is, I think, in the last few days, the selling of ETFs, which basically own long bonds as opposed to short bonds," Gross said.

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