Despite Federal Reserve chatter about normalizing monetary policy and tapering bond buying, Bill Gross — manager of the world’s largest bond mutual fund — says that low interest rates will persist “for decades to come.”
In his monthly investment outlook for October, the PIMCO manager waxes theological about the cruelty of a world where sickly lion cubs become hyena food, but sees a parallel between an indifferent nature and repressively low interest rates that punish savers.
Predicting low policy rates not just for the next year or two but for decades, Gross compares the current situation to the early 1940s — “the last time the U.S. economy was this highly levered” — when 10-year Treasury rates averaged 3% less than nominal GDP for a quarter-century.
In today’s circumstances, that implies a “10-year Treasury at close to 1% and the policy rate at 25 basis points until sometime around 2035!” Gross writes, adding: “I’m not gonna stick my neck out for that – April, May and June of 2013 have taught me a lesson that low yields can become high yields almost overnight. But they should stay abnormally low.”
While Gross professes “rage and incomprehension at the pain and death of living things,” he comes to accept that government financial repression — channeling funds to itself to maintain near-zero rates — is necessary in an economy in which households can’t afford to pay higher rates.
“How high a rate can a homebuyer handle?” he asks. “The increase of over 125 basis points in a 30-year mortgage over the past 6–12 months seems to have stopped housing starts and importantly mortgage refinancings in its tracks. It was the primary ‘financial condition’ that Chairman [Ben] Bernanke cited in his September press conference that shifted the ‘taper to a tinker to a chance’ that maybe they might do something next time.”
So, while Gross says that tapering must commence at some point — “they can’t just keep adding one trillion dollars to their balance sheet every year without something negative happening” — once quantitative easing ends, rates will still remain low.