Bond guru Bill Gross is warning about looming interest rate increases and the damage they can do to a debt-laden global economy.
In his monthly investor outlook, the Janus Henderson Advisors fund manager said the course of global central banks toward tightening policy could be perilous for the economic recovery. Raising interest rates will increase the cost of short-term debt that corporations and individuals hold.
In the U.S. alone, households have $14.9 trillion in debt while businesses owe $13.7 trillion, according to the Federal Reserve.
"While governments and the U.S. Treasury can afford the additional expense, levered corporations and individuals in many cases cannot," Gross said.
The Fed is on a course of gradual rate increases, with financial markets expecting it to approve one more rate hike this year. In addition, other central banks are pulling the reins on bond-buying and other liquidity programs aimed at injecting cash into their respective economies.
"The reliance on historical models in an era of extraordinary monetary policy should suggest caution," Gross wrote. "Logically (a concept seemingly foreign to central banks staffs) in a domestic and global economy that is increasingly higher and higher levered, the cost of short-term finance should not have to rise to the level of a 10-year Treasury note to produce recession."
He continued his warnings about the current environment, particularly with tighter central bank policies ahead.
"Today's highly levered domestic and global economies which have feasted on the easy monetary policies of recent years can likely not stand anywhere close to the flat yield curves witnessed in prior decades," he said. "Central bankers and indeed investors should vie additional tightening and 'normalizing' of short-term rates with caution."
Source: Bloomberg Pro Terminal
Jr Trader Alexander Kumanov
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