Billionaire bond investor Bill Gross says investors should plan for asset purchases by global central bankers to continue to dominate financial markets and keep interest rates artificially low.
“For now, investors must go with, indeed embrace this financial methadone QE fix,” Gross wrote in a monthly investment outlook published Monday. “Quantitative easing will continue even though the dose may be reduced in future years. But while a methadone habit is far better than a heroin fix, it has created and will continue to create an unhealthy capitalistic equilibrium that one day must be reckoned with.”
Yields on 10-year U.S. Treasuries are likely to rise gradually but stay artificially low “due to the kindness of foreign central bank quantitative easing policies,” according to Gross, 72, who runs the $1.77 billion Janus Global Unconstrained Bond Fund. The fund returned 5.3% in 2016, beating 55% of its Bloomberg peers, and since he took over in October 2014 it’s up about 4.8%.
He said in January that 10-year Treasuries above 2.6% would signal a bond bear market as rising rates reduce the value of older debt. Rates are expected to pass 2.6% in the second quarter of this year, according to data compiled by Bloomberg.
“I would venture a guess that without QE from the ECB and BOJ that 10-year U.S. Treasuries would rather quickly rise to 3.5% and the U.S. economy would sink into recession,” Gross wrote Monday.
The Federal Reserve is expected to begin shrinking its balance sheet of mortgage-backed securities as soon as the fourth quarter of this year, a move with potential to increase borrowing costs for U.S. homebuyers. In the past year alone, the Fed bought $387 billion of mortgage bonds just to maintain its $1.75 trillion in holdings. Getting out of the bond-buying business as the economy strengthens could help lift 30-year mortgage rates past 6% within three years, according to Moody’s Analytics Inc.
“A client asked me recently when the Fed or other central banks would ever be able to sell their assets back into the market,” Gross wrote. “My answer was ‘NEVER.’ A $12 trillion global central bank balance sheet is PERMANENT – and growing at over $1 trillion a year, thanks to the ECB and the BOJ.”
— Check out Bill Gross: Forget Dow 20K, Here’s the Number to Watch on ThinkAdvisor.