Central banks must use caution in further tightening, Gross says

The go-slow warning marks a shift for the billionaire Janus bond fund manager

Jul 20, 2017 @ 11:01 am

By Bloomberg News

It won't take much for the Federal Reserve to raise short-term interest rates too far, triggering an economic reversal making indebted students, corporations and other borrowers unable to repay loans, according to billionaire bond manager Bill Gross.

"Central bankers and indeed investors should view additional tightening and 'normalizing' of short-term rates with caution," Gross, who runs the $2.1 billion Janus Henderson Global Unconstrained Bond Fund, said in an investment outlook published Thursday.

The Fed has hiked its short-term funds rate four times since December 2015, including twice this year. The implied probability of another rate hike in 2017 was about 40 percent as of late Wednesday, according to data compiled by Bloomberg. The median Fed target rate is 1.375 percent this year, rising to 2.94 percent in 2019.

If short-term rates rise faster than long-term rates, it causes a flattening yield curve, historically often a precursor to recessions, such as the 2007-2009 financial crisis that was underway long before the collapse of Lehman Brothers Holdings Inc. Because rates have been so low for so long, it could take a small move on the short end to trigger an economic reversal, according to Gross.

"Most destructive leverage -- as witnessed with the pre-Lehman subprime mortgages -- occurs at the short end of the yield curve as the cost of monthly interest payments increase significantly to debt holders," he wrote.

HIGH LEVERAGE

Yields have already flattened since the Fed ended its asset purchases under its quantitative easing program, leading to higher short-term rates, he wrote. Post-crisis global quantitative easing has led central banks to "overstuff" their balance sheets by more than $15 trillion, according to Gross.

"My analysis shows me that the current curve has flattened by nearly 300 basis points since the peak of Fed easing in 2011/2012," Gross wrote. "Today's highly levered domestic and global economies, which have 'feasted' on the easy monetary policies of recent years, can likely not stand anywhere close to the flat yield curves witnessed in prior decades."

The go-slow warning marks a subtle shift for Gross, who has repeatedly argued for hikes because persistently low rates harm banks, insurers and individual savers while distorting the economy with inflated asset prices. Now he's warning that borrowers with short-term debt may be among the biggest risks to the economy.

The Janus Henderson Global Unconstrained Bond Fund returned 1.9 percent this year through July 18, trailing 74 percent of its peers, according to Bloomberg data. It has returned 6.3 percent since Gross took over management in October 2014 after leaving Pacific Investment Management Co.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Featured video

Events

The power of data

Your clients have financial news and data at their fingertips, but donít know how to interpret it. Katy Gibson of Envestnet|Yodlee and Blake Kannady of Envestnet discuss the power of leveraging aggregated data.

Recommended Video

Path to growth

Latest news & opinion

Lightyear Capital takes 50% stake in $9 billion HPM Partners

Private equity backing could fuel acquisitions by the large RIA.

Tax reform: 7 essential strategies for financial advisers

While advisers face the difficult task of analyzing the law's impact, they will also have a significant opportunity to prove their value by implementing money-saving strategies for clients as well as their own businesses.

Tax law: Everything advisers need to know about the pass-through provision

The provision is tricky, but could provide advisers and business-owner clients with sizable tax savings.

Bill requiring fiduciary disclosure reintroduced in New Jersey

Measures would obligate financial advisers to tell clients they do not have to act in their best interests.

Merrill Lynch to let advisers text with clients

Texting has been a popular mode of communication for years, but in the past the firm's regulations have prevented advisers from using it.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print