Bill Gross on the End of the Great Bond Bull Market

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, we are at the Future Proof Conference in the glorious Huntington Beach, and we have a very, very special guest. This is something that we recorded live, on stage, on a beach. We've never done that before.

Joe Weisenthal (0:30)

Never on a beach before, truly extraordinary moment. Beautiful Huntington Beach. It really is kind of like a festival here, and this was a really fun conversation to do.

Tracy Alloway (0:38)

Yep, so we are speaking with Bill Gross, the Bond King himself. Obviously, he has a lot of thoughts on the state of the bond market now, but we're also gonna talk to him about his career and how investing and trading debt has actually changed over the decades.

Joe Weisenthal (0:54)

Yeah, really fun conversation.

Tracy Alloway (0:56)

Take a listen. Bill, you brought out the sunglasses, huh?

Bill Gross (1:01)

I did, it's been 10 years. Last time, it didn't work too well, but...

Joe Weisenthal (1:06)

Try it again.

Tracy Alloway (1:07)

You'll be good this time. I wanna start out with, we're in the midst of what seems like another interest rate cycle of some sort. No one really knows how long it's gonna last. There aren't that many people around nowadays who have lived through different interest rate cycles. And you actually started your career in the 1970s in an era of stagflation, in an era where the Fed was hiking.

We didn't have derivatives to hedge duration risk. We didn't have Bloomberg terminals. We had Quotrons. What was that like?

Bill Gross (1:41)

Well, it was much different.

Bear markets are not as much fun as bull markets, depending upon your position. But interest rates got to 15% in 81, 82, somewhere in there. And the interesting thing is is that they were almost self-hedging because the duration of a 30-year treasury at 15% was about four and a half to five years. It was like a five-year today or close to it. And so at 15% with a very short duration, it meant that interest rates could go up to 18% and you still wouldn't lose money. It was a golden opportunity.

Joe Weisenthal (2:26)

When you think back, obviously, as Tracy mentioned, you started at Pimco in the early 70s and so there were several years of bond bear market before the great bull market, which we'll talk about. What did you learn then about surviving in a bear market for an asset class?

Bill Gross (2:48)

Well, it depends on who you're investing for. If you're looking for a client and trying to grow a business, then you have to be aware that relative performance is important, but if it's a significant bear market, that absolute performance is crucial as well.

Investors and clients will just leave no matter how good you were relative to the market. So I think that was key back then, relative performance. And then stepping on the accelerator in 81, 82, and buying a secular bull market, and it was a bull market.

Tracy Alloway (3:32)

So nowadays we kind of take for granted that people actively trade bonds. You buy and sell them.

But when you started out, that wasn't the case at all. Walk us through the thought process and the opportunity that you saw in trading bonds.

Bill Gross (3:50)

Right, well there were no real computers, no clearing house, overnight types of trades. As a matter of fact, at Pimco, which was owned by Pacific Mutual, downtown LA, we had a billion dollars in a vault. And I was hired not for Pimco, but really for private placements. And one of my jobs, 25% of the $11,000 I made each year was to go down into the vault and to actually clip coupons. You've heard of coupon clipping? I did a lot of that.

And back in the day, because the bonds were in the vault, it was pretty hard to get them to New York. It took two or three days to get them to New York. Like I say, there were IBM 360s, but nothing in terms of connectivity.

And so the physical trading of bonds and stocks was very difficult and allowed for illiquid markets.

Joe Weisenthal (5:01)

Talk to us more about, you mentioned 81, and then you like pressed down on the accelerator and rode this incredible wave, right? This incredible, roughly, I guess, 40 year, basically bull market in bonds. But talk to us, you know, if you look at your career and you think, the Bond King, talk to us about the role of timing and how crucial that was, and when you think about the success that you had at Pimco, et cetera, just being there at the right time and the role of, I guess, a little bit of luck.