A day after the Federal Reserve decided once again not to raise interest rates, bond fund manager Bill Gross inveighed against the central bank’s near-zero interest rate policy, which has persisted for more than six years.
In his latest investment outlook for Janus Capital, where he’s the lead manager of the Janus Global Unconstrained Bond Fund (JUCTX), Gross writes that “low interest rates are not the cure – they are part of the problem.”
Despite near zero interest rates for almost 6-1/2 years, “corporate investment has been anemic,” writes Gross. Quality companies are borrowing in huge quantities — $1.02 trillion in 2015 so far – because of low rates, but they’re using the money to buy back stock rather than to invest in growth, says Gross.
In addition, writes Gross, companies with extremely low credit ratings have been able to borrow at rates below 5%, creating “a host of zombie and future zombie corporations [who] now roam the real economy.”
It wasn’t supposed to be this way. “Historically the Fed and almost all other central banks have comfortably relied on a model which assumes that lower and lower yields will stimulate not only asset prices — but investment spending in the real economy … and a trickle-down effect leading to higher real wages.” But this “money for nothing policy” hasn’t worked as expected, writes Gross.
In addition, near zero rates also “sap banks’ interest margins … cause pervasive mispricing in financial markets and threaten the solvency of insurance companies and pension funds,” writes Gross, quoting from a Bank for International Settlements report.
On the flip side, near-zero rates have fed bull markets in stocks — in the U.S. and especially China — but maybe too much, raising “the patient’s temperature to threatening status,” writes Gross.