By William Watts, MarketWatch
NEW YORK (MarketWatch)—Not everyone is a fan of Bill Gross’s writing style, but the bond guru’s March investment outlook is worth reading for anyone struggling to figure out what to make of negative bond yields and the phenomenon of investors paying governments to hold their money for them.
In trademark fashion, the latest outlook begins with a wacky touch. Perhaps belying an annoyance with those online personality quizzes that seem to be everywhere on social media, Gross asks: “If you were a dog, what kind would you be?” This takes him on a recollection of his favorite dogs, including a Pomeranian named Wiggles.
But the outlook goes on to elaborate on something that has become a theme for the former Pimco chief, who now runs the Janus Global Unconstrained Bond Fund for Janus Capital Group: Namely, how ultraloose monetary policies by the world’s largest central banks threaten traditional business models.
The phenomenon of negative yields across several European yield curves is particularly astounding, he writes, noting that the possibility of negative rates was “rarely if ever contemplated in academia” before 2014. See: Italian bonds just marked an important milestone.
“It was as inconceivable as the ‘Big Bang’ with its black holes that followed billions of years later; the rules of physics or in this case the rules of money didn’t apply; it was impossible to imagine,” Gross writes.
(Well, maybe not that impossible , argues Dan McCrum at FT Alphaville).
It doesn’t leave much for investors, Gross said.
“The universe of negative-yielding notes and bonds in Euroland now total almost $2 trillion. Not even ‘thin gruel’ is being offered to our modern day Oliver Twist investors. You have to pay to come to the dinner table and then sit there staring at an empty plate,” Gross said.
Gross’s biggest worry, however, is that low interest rates will destroy business models crucial to modern-day economies:
“Pension funds and insurance companies are perhaps the most important examples of financial sectors that are threatened by low to negative interest rates. Both sectors have always attempted to immunize their long term liabilities (retirement, health, morbidity) by investing at a similar duration with an attractive yield. Now that negative and in almost all cases low short term rates are expected to persist, long term bonds and similar duration assets do not offer the ability to pay claims 5, 10, 30 years into the future.”
It is a similar story for households, which struggle to save enough money at a high enough rate to pay for education, health care and retirement, he says. “Negative/zero-bound interest rates may exacerbate, instead of stimulate low growth rates in all of these instances, by raising savings and deferring consumption.”
Gross is hardly the only one pondering the phenomenon of negative yields. Economist Nouriel Roubini, in a column published Monday, also takes a crack at the subject, warning that for negative rates to jump-start the economy, they need to be accompanied by fiscal stimulus.
Otherwise, he says, “the longer we may inhabit the world of negative nominal interest rates.”
Gross has never been a fan of QE or ultraloose monetary policy. In 2011, he was forced to backtrack after dumping U.S. Treasurys in the belief that interest rates would spike as the Fed ended its second round of quantitative easing. The flagship Pimco Total Return Fund subsequently recovered as Gross changed course.
But Gross argues that central banks “have gone and continue to go too far in their misguided efforts to support future economic growth.”
Returning to the canine theme, Gross says investors should stay conservative: “Own high quality bonds and low P/E, high-quality stocks if you want to stay out of the doghouse.”