Policy makers are robbing savers by driving down real interest rates as they keep borrowing costs at record lows in a “devil's bargain,” Pacific Investment Management Co.'s Bill Gross said in a commentary.
“Central banks and policy makers are taking money from one class of asset holders and giving it to another,” Gross wrote in an investment outlook posted on the firm's website. “A low or negative real interest rate for an ‘extended period of time' is the most devilish of all policy tools. And the asset class holder that it affects, or better yet, infects, is the small saver and institutions such as insurance companies and pension funds.”
The difference between the yield on 10-year Treasury notes and the year-over-year consumer price index, known as the real yield, was 1.90 percent today, down from an average of 2.62 percent since 1991. It narrowed from a high of 5.95 percent in August 2009 as the
Federal Reserve has kept the benchmark interest rate in a range of zero to 0.25 percent to spur economic growth.
The drop in real 10-year interest rates has “arguably been responsible” for gains in the stock market and 2 percent to 3 percent annual appreciation in bonds, Newport Beach, California- based Gross wrote. At the same time, it has lowered the returns of small savers and investors in long-term fixed-income assets, he wrote.
“The metaphorical devil's bargain has its equivalent in the credit markets these days,” Gross wrote. “ To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation,” he wrote.
Reducing Holdings
Gross said investors may want to reduce holdings of Treasuries and U.K. gilts because of the unattractive returns from real yields.
“Old-fashioned gilts and Treasury bonds may need to be 'exorcised' from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” he wrote.
Gross cut the proportion of U.S. government and related securities in Pimco's Total Return Fund to 22 percent of assets in December from 30 percent in November, according to a report placed on the company's website on Jan. 14. He raised holdings of mortgage debt in December to 45 percent, the highest level since July 2009, from 43 percent as prices of government securities fell.
The real yield on 5-year Treasury Inflation Protected Securities was minus 0.35 percent today, down from the 5-year average of 1.29 percent.
Lost Its ‘Anchor'
The negative yield “is perhaps reflective of a market that has lost its fundamental value anchor,” Gross wrote. “A century-long history of average 5-year real yields would point out that bond investors in Aaa 5-year sovereign space have demanded and received a real interest rate return of 1.5 percent instead of today's -0.1 percent. We are being shortchanged, in other words, by 160 basis points from the get-go.”
The $239 billion Total Return Fund managed by Gross posted a 7.37 percent gain in the past year, beating 82 percent of its peers, according to data compiled by Bloomberg. The one-month performance is 0.18 percent, beating 43 percent of competitors. Pimco is a unit of Munich-based insurer Allianz SE.
