On Thursday, Gross said his personal portfolio is “increasingly leaning toward a small percentage of medium-term bonds.”
An inverted yield curve -- when short-term rates rise above longer-term yields -- increases the risk of a downturn because banks will be reluctant to lend, choking off the credit flow, according to Gross. The potential damage from the current inversion, or negative carry, could be bigger than previous recessions because of the higher debt load.
“The longer and wider the negative carry, the deeper the recession,” he wrote.
For investors who are gun-shy after the brutal bond losses this year, Gross advised: buy the iShares TIPS exchange traded fund (TIP), which invests in inflation-linked bonds.
Yields on five-year Treasury Inflation-Protected Securities, or TIPS, reached 2% on Sept. 30, a level last seen in 2008. TIPS not only offer protection against inflation, they also provide the potential for capital appreciation should rates fall, said Gross.
--With assistance from Sam Hall.
This article was provided by Bloomberg News.