With the American government “pocket-picking” investors, it’s time for a “mutiny” says US bond investor Bill Gross.
The co-founder of bond fund PIMCO says the current combination of high inflation and low bond yields will persist as the government tries to inflate its way out of debt. As joint manager of the world’s largest bond fund, Gross attracted attention recently by selling off huge tranches of US Treasury bills, and he urges investors to follow suit.
Gross isn’t responding to S&P’s recent headline-grabbing threat to downgrade US government debt; instead, he is more worried about the policies the government will use to fix its balance sheet.
The veteran investor says that successive bouts of quantitative easing (QE) have pushed up T-Bills and kept them “overvalued compared to the last 30 years”. As bond yields and prices move in an inverse relationship, this has kept yields low.
The result is that investors are being shortchanged by 1-2% a year compared to historical norms. Once you throw in the inflation, also caused by QE, investors “in many cases receive negative real yields”.
This is no accident, says Gross. It’s a tactic that indebted governments have carried out for thousands of years. For example, “the ancient Romans used to shave metal coins in an attempt to monetise existing debts”.
Politicians have become more canny over time, using ever “more sophisticated techniques”. In WWII the impoverished US and UK government capped bond yields so that the negative real interest rates would slowly eat away their debt.
With governments doing the same again, “bond investors should revolt”. They should look to non-dollar denominated emerging market debt that offers higher yields and which is often backed by “more pristine balance sheets”. Or if you “have to buy AAA” then “Canadian or Australian bonds may also fit”. Either way, holding “Treasuries at these yield levels for an extended period of time represents and abdication of responsibility”.