Bill Gross warns US$10 trillion negative-yield bond pile is a 'supernova that will explode one day'

Former bond market king Bill Gross.
Former bond market king Bill Gross.PHOTO: REUTERS

LOS ANGELES (BLOOMBERG) - Former bond market king Bill Gross issued a dire warning on Thursday (June 9) that central bank policies that pushed trillions of dollars into bonds with negative interest rates will eventually backfire violently.

"Global yields lowest in 500 years of recorded history," Mr Gross, 72, wrote on his Janus Capital Group Inc Twitter site. "This is a supernova that will explode one day."

A supernova is a star at the end of its life that suddenly increases greatly in brightness because of a catastrophic explosion that ejects most of its mass.

Mr Gross has argued for some time that the economy is at the end of a decades-long cycle of expanding credit that has culminated in negative interest rates, a situation he said is unsustainable.

Rather than spurring economic growth, low rates are promoting asset bubbles as investors reach for higher yields while punishing individual savers and industries that rely on interest rates, such as bank and insurance companies, according to Gross.

Fitch Ratings in a report on June 2 said that unconventional monetary policies, regulatory risk mitigation by banks and a flight to safety in global financial markets have all contributed to the ongoing rise in the amount of sovereign debt trading with a negative yield.

The total amount of fixed-rate sovereign debt trading at negative yields grew to US$10.4 trillion as of May 31, up 5 per cent from the US$9.9 trillion that Fitch calculated as of April 25. There were no major shifts in the distribution of debt among the 14 countries with negative-yielding debt, with Japan still by far the largest source, Fitch said.

Mr Gross said in an earlier June 2 note that the era of 7.5 per cent annualized investment gains is history and that investors should eventually take positions to protect principal or profit from market declines.

"Returns will be low, risk will be high and at some point the 'Intelligent Investor' must decide that we are in a new era with conditions that demand a different approach," he wrote. "Negative durations? Voiding or shorting corporate credit? Buying instead of selling volatility? Staying liquid with large amounts of cash? These are all potential 'negative' carry positions that at some point may capture capital gains or at a minimum preserve principal."

Mr Gross's Janus Global Unconstrained Bond Fund is up 3.2 per cent this year, outperforming 72 per cent of Bloomberg peers. It has returned 2.2 per cent since Mr Gross took over management in October 2014 after an acrimonious departure from Pacific Investment Management Co, where he was chief investment officer.

Investors added US$144 million to the US$1.44 billion fund in May, the biggest net inflow since December 2014.

With additional information from the Straits Times