Bill Gross Says 'Total Return' Strategy He Pioneered Is 'Dead'

What You Need to Know

Yields are much lower than when he first coined the concept.
At about 4.6%, the 10-year Treasury yield compares with a peak of almost 16% in 1981.
U.S. debt requires the government to raise the level of outstanding Treasurys by up to a net $2 trillion a year, he says.

Bill Gross, who pioneered the “total return” strategy in the 1980s that revolutionized the bond market, says the approach is now defunct.

Instead of just picking up steady interest payments like his peers did at the time, the co-founder of Pacific Investment Management Co. created the firm’s Total Return Fund in 1987 to take active positions in duration, credit risk and volatility.

The idea is that more than just clipping coupons, bond investors can also benefit from capital appreciation as bond prices rise and yields fall.

In an outlook published Thursday, Gross noted that what’s different now is that yields are much lower than when he first coined the concept, leaving investors with less room for price appreciation.

At about 4.6%, the 10-year Treasury yield compares with a peak of almost 16% in 1981.

Instead of falling as bond bulls expect, 10-year yields are likely to rise above 5% over the next 12 months because the government is flooding the market with debt, Gross wrote.