Jim Young/Reuters
- Two billionaire investors who share the "Bond King" nickname are sounding the recession alarm.
- Bill Gross and Jeffrey Gundlach expect higher interest rates to hammer growth in the near future.
- Gross has warned the US economy is heavily indebted and faces several global headwinds.
Brace for an imminent recession as higher interest rates strangle the US economy, two billionaire investors both known as the "Bond King" have warned.
"Be cautious. Recession to come soon," Bill Gross, Pimco's cofounder and the former chief of its flagship Total Return fund, tweeted on Thursday.
"A year ago I argued in this space that 4.5% FF was the limit and it appears it was," Gross added, referring to the federal funds rate. The Federal Reserve lifted its benchmark interest rate to upwards of 4.75% on Wednesday.
Jeffrey Gundlach, the CEO of DoubleLine, echoed Gross' grim prediction in his own Thursday tweet. He pointed to the narrowing inversion in the yields from 2-year and 10-year Treasuries, noting the gap between them has shrunk from 107 basis points to 40 in recent weeks.
The fixed-income specialist also noted that yields on 2-year Treasuries and longer-dated government bonds are now well below the current fed funds rate. Bond yields signal investors' expectations for growth, inflation, and interest rates in the months and years ahead.
"Red alert recession signals," Gundlach said.
The veteran investor predicted in another tweet that the Fed will cut rates significantly in the near future. It has hiked them from nearly zero to their highest level since 2007 over the past 12 months, in response to inflation hitting a 40-year high.
The central bank is betting that higher rates will make borrowing more costly and encourage saving over spending, cooling price growth. However, they also pull down asset prices and temper demand, increasing the risk of markets crashing and the economy tanking.
In October, Gross cautioned against hiking rates to 4.5% or higher. He feared that would crimp lending and overwhelm the heavily indebted US economy — especially when it already faced growth headwinds including the Russia-Ukraine war and the European energy crisis.
Meanwhile, Gundlach predicted last week that the turmoil in the banking industry will spark a recession within the next four months. He also declared in February that stocks are likely to underperform for a while, as higher rates are a drag on company valuations.
Gross has previously jabbed at Gundlach over their shared nickname, labeling him the "self-anointed 'bond king'" in an October outlook.