Billionaire investor Bill Gross warns of chaos in housing and the bond market as the Fed tightens

• According to Bill Gross, the Federal Reserve’s rate hike campaign could plunge markets into a crisis next year.
• “We have potential chaos in the financial markets,” the billionaire investor said on Tuesday.
• The real estate and bond markets look particularly vulnerable, Gross added.

LoadingSomething is loading.

Thanks for registering!

Access your favorite topics on the go in a personalized feed. Download the app

The Federal Reserve’s ongoing monetary tightening campaign could fuel chaos in US housing and bond markets, billionaire investor Bill Gross has warned.

PIMCO’s former chief investment officer said Tuesday he was concerned there could be a recession and market crises in 2023 if interest rates continue to rise.

“The economy has been boosted by trillions of dollars in tax spending, but when that wears off I think we’re going to have a mild recession,” Gross told CNBC’s Halftime Report.

“If interest rates keep going up, we’ll have more than that,” he added.

“We have potential chaos in the financial markets.”

Gross warned that the US housing market could be particularly vulnerable to rising borrowing costs.

Market activity stalled in 2022 after record-low interest rates over the previous two years fueled a potential housing bubble, with buyers deterred by the average 30-year mortgage rate, which rose 320 basis points to 6.31%, according to YCharts data.

“The Fed has given homeowners the option to call their mortgages and borrow at 3% or 4%,” Gross said. “If the Fed keeps raising rates, it will severely limit the ability to convert some of your properties that are falling in price into equity, and that will serve as a warning to the housing market.”

The billionaire investor, known as the “bond king,” also said rising interest rates could cause turmoil in bond markets.

The Fed has unleashed what economists are calling a “reverse currency war” in 2022, with central banks around the world struggling to keep up with their aggressive rate hikes to avoid higher import costs and a devaluation of their own currencies.

The Bank of Japan made its latest move on Tuesday, easing yield curve controls in bond markets – which investors believe will set the stage for interest rates to climb above 0% in the Asian nation next year.

US 10-year Treasury yields rose 9.8 basis points on Tuesday after the BoJ’s surprise announcement that sparked a rise in the long-suffering Japanese yen.

“A lot of money was invested to sell the yen and buy relatively safe alternatives like government bonds or stocks,” Gross said. “With the yen strengthening instead of weakening and interest rates moving slightly higher, this yen carry trade has a good chance of being reversed.”

“The 10-year is up 10 basis points based on the BoJ’s move last night,” he added.

The Fed has hiked interest rates from near zero to around 4.5% this year and has signaled it will keep its benchmark rate above 5% for all of 2023 to tame inflation that has been high for nearly four decades.

However, in an investment outlook released on Tuesday, Gross said the Fed has raised rates enough to stem rising prices and risks weakening the economy if it pushes it higher.

“The Fed should now stop raising rates and see if the bowl has been sufficiently emptied,” he said.

Continue reading: The Fed has the world in its hands – and its aggressive moves are creating global economic chaos that could come back hurting the US