Investors in U.S. Treasury bonds are like frogs in a kettle of water under which the heat is being gradually turned up without their realizing it, says Bill Gross, who runs the world's largest bond fund.
He is still exhorting investors to get out of U.S. Treasurys, after the latest jobs and manufacturing data, which saw yields on Wednesday alongside stocks.
"Much of the Treasury yield curve now rests in negative territory when compared with expected future inflation, and that should send our bond investor into a hoppin' funk. Prices are already nearing the boiling point and his coupons are subzero, CPI adjusted," Mr. Gross writes in his latest commentary to PIMCO investors.
"Total return…and our frog…are cooked, or if not, they are certainly trapped in a future low return kettle of water."
"Because [quantitative easing steps] cover an extraordinary period of monetary policy with a limited time frame, there is not enough data to indicate whether the end of QEII will lead to higher or even lower rates, although higher is our strong preference," he says, pointing out that investors may be stuck holding bonds that nobody else wants.
"There is, however, overwhelming evidence... that existing Treasury yields fail to adequately compensate investors for the risk of holding them when measured on an historical basis."
Mr. Gross has been shorting Treasuries in recent weeks and has said that he'll only buy them again if the U.S. heads into a recession.
He makes three key points in his commentary:
- Rather than outright default, many countries attempt rather successfully to keep nominal interest rates lower than would otherwise prevail.
- Over the long term, this "financial repression" results in a transfer of wealth from savers to borrowers.
- Investors shouldn't give their money away, and at the moment, the duration component of a bond portfolio comes close to doing just that – because it doesn't yield enough relative to inflation