In its latest monthly report, the so-called bond king, Bill Gross, warns of the risks that the Zero Bound Yield Curve brings to credit markets.
Gross, who has urged the Federal Reserve to raise rates several times this year, says that the near-zero levels are hurting the real economy and affecting the balance sheets of institutional investors such as pension funds and insurance sector companies because “profit growth is stunted, if short term and long term yields near the zero bound are low and the yield curve inappropriately flat”.
In his opinion, the US government should sell part of its more than $2 trillion in long-term bonds and buy short-term paper to improve the slope of the curve. But he doubts that the Fed will take that route because he believes that “central bank historical models fail to recognize is that over the past 25 years, capitalism has increasingly morphed into a finance dominated as opposed to a goods and service producing system”.
Another recommendation the bond guru makes to central banks is to raise their inflation targets, to say 3%, as the president of the San Francisco Fed, John Williams recently said. However, Gross considered unlikely that central banks of major economies would change their ways because they are “stubborn, and reluctant to adapt to a significantly changed finance based economy.”
You can read the report following this link.