Bill Gross says negative rates are like ‘supernova’ that will explode

Galaxy where a supernova probably resulted in a black hole: Are global bond markets facing a similar fate?Legendary bond investor Bill Gross has warned central bank policies that pushed trillions of dollars into bonds with negative interest rates will eventually backfire violently.

“Global yields lowest in 500 years of recorded history,” Gross, 72, wrote this week on the Janus Capital Group Twitter site. “$US10 trillion of neg. rate bonds. This is a supernova that will explode one day.”

A supernova is a star at the end of its life that suddenly increases greatly in brightness because of a catastrophic explosion that ejects most of its mass.

Gross, who manages the $US1.4 billion ($1.9 billion) Janus Global Unconstrained Bond Fund, has argued for some time that the economy is at the end of a decades-long cycle of expanding credit that has culminated in negative interest rates, a situation he said is unsustainable.

Rather than spurring economic growth, low rates are promoting asset bubbles as investors reach for higher yields while punishing individual savers and industries that rely on interest rates, such as bank and insurance companies, according to Gross.

He said in a June 2 note that the era of 7.5 per cent annualised investment gains is history and that investors should eventually take positions to protect principal or profit from market declines. Gross: Global yields lowest in 500 years of recorded history. $10 trillion of neg. rate bonds. This is a supernova that will explode one day— Janus Capital (@JanusCapital) June 9, 2016

“Returns will be low, risk will be high and at some point the ‘Intelligent Investor’ must decide that we are in a new era with conditions that demand a different approach,” he wrote. “Negative durations? Voiding or shorting corporate credit? Buying instead of selling volatility? Staying liquid with large amounts of cash? These are all potential ‘negative’ carry positions that at some point may capture capital gains or at a minimum preserve principal.”

Gross’ fund has gained 3.2 per cent in value this year, outperforming 72 per cent of its peers. It has returned 2.2 per cent since Gross took over management in October 2014 after an acrimonious departure from Pimco, where he was chief investment officer.

Investors added $US144 million to the $US1.44 billion fund last month, the biggest net inflow since December 2014.


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