Bill Gross Says Negative Interest Rates Will Destroy Banks and Financial Markets

Bill Gross, co-founder and co-chief investment officer of Pacific Investment Management Company (PIMCO), speaks at the Morningstar Investment Conference in Chicago
Bill Gross, co-founder and co-chief investment officer of Pacific Investment Management Company (PIMCO), speaks at the Morningstar Investment Conference in Chicago, Illinois, June 19, 2014. REUTERS/Jim Young (UNITED STATES - Tags: BUSINESS) - RTR3UQFZ
Photograph by Jim Young — Reuters

Bill Gross, popularly dubbed the “Bond King,” is bracing for something of a credit implosion in the future, driven by the controversial policy of negative interest rates.

In an apocalyptic note to investors Thursday, the Janus Capital fund manager (JNS) compared the current financial system to the fate of the sun five billion years in the future. If current monetary policies such as negative interest rates and quantitative easing persist, the system will collapse.

“Summer, for our credit-based financial system, is past,” Gross writes in his month letter to investors. Negative interest rates have become the norm in nations seeking to promote spending and borrowing while deterring saving. That includes several Scandinavian countries and most recently, the Bank of Japan.

But policymakers are mistaken, Gross says. According to the fund manager, historical proof should show that lowering interest rates doesn’t stimulate growth. The U.S., though, was one of the first developed countries to significantly cut interest rates after the financial crisis, and our economic recover has been stronger, relatively, than Europe and elsewhere.

Gross says, however, quantitative easing measures have created an unsustainable habits in the real economy. His main concern is that low interest rates has lead to way too much debt, up, he says, to a recent $58 trillion in the U.S. alone, from just $1 trillion in the 1970s, and too low profits for the financial sector. The result, borrowers pile on debt at relatively low cost, while lenders see lower and lower profit margins. In particular, Gross names entities that survive on 7%-to-8% return on assets as the major victims: banks, pension funds, and insurance companies.


More alarming however is that Gross says there’s no end in sight to these measures. It’s a view supported many, including Barclays, which said that negative interest rates are likely to remain for years as ailing countries attempt to stimulate growth.

“Finance itself is burning out like our future Sun…But central bankers seem ever intent on going lower, ignorant in my view of the harm being done to a classical economic model that has driven prosperity—until it reached a negative interest rate dead end and could drive no more,” Gross says.

Gross warned against buying risker, higher-yielding, but longer-term government bond in the negative interest world, and suggested that shorter bond maturities with yields in a “mildly levered form,” could produce a return of as much as 6%.

On the same day that Gross was predicting doom in the bond market, his old firm, PIMCO, came out with the opposite view. Strategists there say junk bonds are now a buy.


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