2016.06.1006:44:00UTC+00Negative Rates Series: Bill Gross Warns Supernova

Bill Gross founder of bond powerhouse Pimco, who currently manages no constraint fund at Janus, warned over $10 trillion worth of bonds that are trading at negative yields. According to latest from rating agency Fitch, negative yielding bonds universe expanded 5% to $10.4 trillion from April 25th to May 31st. Japan has been the biggest source of negative yielding bonds. Today Japanese 10-year yield dropped to new low of -0.15%.

In a tweet, Mr. Gross said, “Global yields lowest in 500 years of recorded history……This is a supernova that will explode one day.” Last year, Mr. Gross successfully predicted the summer selloffs in German bund.

With central banks continuing their asset purchases, asset managers have all piled up into the bond market, without properly assessing the risk. According to Bank of America Merrill Lynch indices, global government bond yield has declined to new record low of 0.65% and investors are still pouring into bonds. If prices take a reverse turn, investors aren’t compensated for the risk they are assuming.

Why lend government and corporate money, when you know that you are going to lose some of that after  a decade or more?

 There are three distinct possibilities –

• Market participants are worried about deflation that can be triggered by a hard landing in China.

• Investors are worried that keeping money elsewhere (equities, commodities) will lead to a larger loss.

• Central banks’ easing has led a frenzy that can be compared only to a bubble.

The last possibility is most worrying since it is highly probable.

According to calculations by Goldman Sachs, investors could lose as much as a trillion-dollar if treasury yield jumps 1%.