Last updated: 06:14 / Monday, 7 March 2016
Monthly Outlook

Bill Gross: “Keep Bond Maturities Short and Borrow" Cheap

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Bill Gross: “Keep Bond Maturities Short and Borrow" Cheap
  • "The banking/finance seems permanently damaged by write-offs, regulation and lower future margins”

In his latest monthly outlook, Bill Gross compares the sun's lifespan and that of capitalism and inmediate needs, "our finance based economic system which like the Sun has provided life and productive growth for a long, long time – is running out of fuel and that its remaining time span is something less than 5 billion years," he writes on his letter, adding that "our global, credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers. Making money on money seems to be the system’s flickering objective. Our global financed-based economy is becoming increasingly dormant, not because people don’t want to work or technology isn’t producing better things, but because finance itself is burning out like our future Sun."

He mentions that what people should know is that the global economy has been powered by credit. And that with negative interest rates dominating 40% of the Euroland bond market and now migrating to Japan, it is less likely that someone will loan money knowing they will receive less in the future. "Negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects that I have warned about for several years now." He adds that governments, pension funds and corporations are suffering because they cannot earn enough on their investment portfolios to cover the promises, and that "the damage extends to all savers; households worldwide that saved/invested money for college, retirement or for medical bills. They have been damaged, and only now are becoming aware of it. Negative interest rates do that".

In his opinion, "the secret in a negative interest rate world that poses extraordinary duration risk for AAA sovereign bonds is to keep bond maturities short and borrow at those attractive yields in a mildly levered form that provides a yield (and expected return) of 5-6%."

You can read the full letter here.

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