Bond king Bill Gross has urged the Federal Reserve to move off 0 per cent interest rates as it is destroying growth and hitting investment returns.
In his latest note to investors, Janus Global Unconstrained Bond Fund portfolio manager Gross said zero-bound interest rates destroy the savings culture of investors, hamper business growth and provide no incentive for companies to spend capital.
“Zero bound interest rates destroy the savings function of capitalism, which is a necessary and in fact synchronous component of investment,” he says. “While 0 per cent or 0.25 per cent or other countries’ financially suppressed yields might be appropriate for keeping their economy’s head above water, they act as a weight or an economic ’sinker’ that ultimately lowers economic growth as well.”
In particular, Gross highlighted the fact that companies are using cheap debt available in the market to buy back their own shares, instead of investing back into the real economy.
Another implication of 0 per cent rates is that insurance companies and pension funds are expected to make returns that are now not attainable in the markets, Gross argues.
“These assumed liabilities were based on the assumption that a balanced portfolio of stocks and bonds would return 7-8 per cent over the long term. Now with corporate bonds at 2-3 per cent, it is obvious that to pay for future health, retirement and insurance related benefits, stocks must appreciate by 10 per cent a year to meet the targeted assumption. That, of course, is a stretch of some accountant’s or actuary’s imagination,” he says.
“There should be space in an economic textbook or the minutes of a central bank meeting to acknowledge the destructive influence of 0 per cent interest rates over the intermediate and longer term,” he adds.
His comments come after the Fed decided to maintain rates in its September meeting, rather than increase them, as had been expected.