US Would Sink Into Recession Without ECB, BoJ Policies

Bond investor Bill Gross said on Monday that without quantitative easing from the European Central Bank and Bank of Japan the 10-year US Treasury yield would “rather quickly” rise to 3.5% and the US economy would sink into recession.

Gross, who runs the $1.8 billion Janus Global Unconstrained Bond Fund, said in his latest Investment Outlook to clients that US Treasury yields will likely rise gradually, yet will stay artificially low due to the “kindness” of foreign central bank quantitative easing policies, Reuters reported.

“Without that financial methadone, both bond and stock markets worldwide would sink and produce a tantrum of significant proportions,” Gross said.

“A 2.45%, 10-year US Treasury rests at 2.45% because the ECB and BoJ are buying $150 billion a month of their own bonds, and much of that money then flows from 10 basis points JGB’s (Japanese Government Bonds) and 45 basis point Bunds into 2.45% US Treasuries.”

Imagine you are a Japanese investor with JGB’s capped at 0.1%. The yield difference is actually amazing and your real yield is quite attractive given the circumstances. And it’s almost a “risk free” trade given the BoJ´s interventions to control yields, Gross said.

On Friday, the yield on the 10-year US Treasury settled around 2.47%.

Gross repeated in his latest research note an assertion he has made for several years that loose monetary policies have “promoted higher asset prices and engendered a modicum of real growth.”

“Capitalism has been distorted: savings/investment has been discouraged by yields/returns too low to replicate historic productivity gains; Zombie corporations have been kept alive in contrast to Schumpeter’s ‘creative destruction’,” he said.

Gross added that debt has continued to rise relative to gross domestic product; the financial system has not been cleansed and restored to a balance where risk and reward are on a level playing field. “Disequilibrium has replaced equilibrium, although it is difficult to recognize this economic phantom as long as volatility is contained,” he said.

Overall, Gross said a client of his recently asked when the Federal Reserve or other central banks would ever be able to sell their assets back into the market.

“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,” Gross wrote.

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Bill Gross