Billionaire investor Bill Gross says the Fed easing up in fighting inflation could fuel a rally in government bonds

• Government bonds may rally if the Federal Reserve eases up on interest-rate hikes, Bill Gross said.
• US Treasuries are "still overvalued but may rally with future Fed ease," the elite investor said.

Government bonds may look like a dicey investment for now, but could soon rally if the Federal Reserve eases up on its interest-rate hikes, according to billionaire investor Bill Gross.

US Treasuries are "still overvalued but may rally with future Fed ease," the Pimco cofounder nicknamed the "Bond King" said on Twitter Thursday, in response to a tweet about him calling government debt "garbage" in 2021.

Government bond prices have plummeted over the past year, causing yields, which rise when prices fall, to soar.

Two-year US Treasury yields have jumped 167 basis points to 4.13% since March 31, 2022, while 10-year US Treasury yields are up 118 basis points to 3.56%.

The sell-off was fueled by the Fed's year of aggressive tightening – because when borrowing costs rise, investors can get better and less risky returns by parking their cash in savings accounts.

But Gross now expects the central bank to start easing up in its war on inflation, after the crash in bond prices stoked fears of a financial crisis by sparking the collapse of Silicon Valley Bank earlier this month.

The California lender's share price plunged 86% in two days after it disclosed it had lost $1.8 billion completing a $21 billion fire sale of its fixed-income portfolio on March 9. The news caused a bank run as customers rushed to pull out their largely uninsured deposits, forcing regulators to take control of the bank.

Fears that the chaos would develop into a full-blown crisis have dragged on other financial institutions like First Republic. They've also fueled the expectation that the Fed will back down from its aggressive tightening campaign to prop up the value of struggling banks' investments and maintain financial stability.

Nearly 50% of traders now expect the central bank to pause its rate-hiking campaign at its next meeting in May, according to CME Group's FedWatch tool.

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