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Widely followed billionaire investor Bill Gross believes Treasury yields have the potential to rise even further in the coming months, with the benchmark 10-year yield possibly hitting 5% in the “near term.”

Gross shared his outlook on surging bond yields during an appearance on CNBC’s “Last Call” on Tuesday evening. “I think we’re gonna go to five [percent],” Gross said, referring specifically 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.”

On Tuesday, the stock market suffered a sharp sell-off as climbing bond yields rattled investors. The S&P 500 dropped 1.4%, falling to its lowest point since June, while the 10-year Treasury yield reached 4.8% — its highest level since 2007. The 30-year Treasury yield also hit 4.9%, matching a 15-year high.

Factors Driving the Surge in Treasury Yields

According to Gross, several key factors are fueling the recent spike in Treasury yields:

• The Federal Reserve’s interest rate hikes — Since March 2022, the Fed has rapidly raised interest rates in an effort to tame high inflation. This monetary tightening has driven up yields across the curve.
• A widening budget deficit — Gross pointed to the Treasury’s rising deficit, expected to top $2 trillion in 2023, as weighing on long-term yields in particular.
• Oversold conditions — In Gross’s view, the bond market has become oversold amid expectations for further Fed tightening and heavy Treasury issuance, exacerbating yield increases.
• ETF selling — Heavy selling of bond ETFs, which disproportionately hold long-term bonds, may also be impacting the long end of the yield curve.

How High Could Yields Go?

While Gross sees potential for the 10-year yield to reach 5% in the coming months, he doesn’t expect yields to rise indefinitely. “I think maybe 5% caps it for the near term,” Gross commented. “It depends, of course, on inflation, depends on economic growth.”

Other notable investors share a similar short-term outlook. Billionaire Ray Dalio said Tuesday that the benchmark 10-year Treasury yield may well hit 5%, citing expectations for a longer period of elevated inflation.

However, analysts caution that forecasting yield levels is highly challenging, especially in the current volatile environment. Much depends on how long the Fed must keep monetary policy restrictive to bring down inflation from its highest levels in 40 years. Cooling inflation could pave the way for an easing of yields.

What’s Driving the Fed’s Aggressive Stance?

According to Gross, the Federal Reserve’s campaign of supersized interest rate hikes that started in March 2022 has significantly shaped the Treasury yield curve.

In six consecutive meetings this year, the central bank has raised its benchmark rate from near zero to a target range of 3–3.25% — the highest since early 2008. Additional jumbo rate increases are expected through year-end as the Fed combats inflation running near 8–9%.

This rapid monetary tightening has transmitted to higher borrowing costs across credit markets. “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.

Market Impacts of Rising Yields

The surge in Treasury yields this year has sent shockwaves through global financial markets, creating volatility in stocks, corporate bonds and other asset classes.

As yields climb, investors demand higher rates of return to compensate for rising inflation and Fed rate hikes. This pressures rate-sensitive investments like tech stocks and forces broader stock market declines.

In currency markets, higher U.S. yields have boosted demand for the dollar. The strong greenback, in turn, adds downward pressure on commodities priced in dollars, like gold and oil.

For consumers, rising yields increase borrowing costs for mortgages, auto loans and credit cards. But savers benefit from higher interest rates on deposits and short-term bonds.

Outlook Remains Uncertain

Bill Gross and other experts may foresee additional upside for Treasury yields in the near term. However, considerable uncertainties remain around the inflation and growth outlook. This will critically influence how high yields ultimately go.

As the Fed battles to restore price stability and investors digest the impacts of aggressive policy tightening, expect increased market volatility across asset classes. For regular Americans, budgeting for higher borrowing costs in 2023 remains a prudent strategy.