Econintersect: The bond investing guru at PIMCO (Pacific Investment Management Company) says that low yields will be extant in the U.S. until the 21st century is more than 1/3 over. He points out that the U.S. had a similar period of very low interest rates with high federal debt for 25 years from the early 1940s into the late 1960s. During that era 30-year Treasuries averaged yields of 3%. Gross says the same conditions are holding sway now.
Gross says it’s all about only going as far with interest rates as the market can satnd. In his October monthly letter (his bold emphasis):
The critical question to ask in terms of the level and eventual upward guide path of the policy rate is how high a rate can a levered economy stand? How much wood can a woodchuck chuck? How high a rate can a homebuyer handle? No one really knows, but we’re beginning to find out. The increase of over 125 basis points in a 30-year mortgage over the past 6–12 months seems to have stopped housing starts and importantly mortgage refinancings in its tracks. It was the primary “financial condition” that Chairman Bernanke cited in his September press conference that shifted the “taper to a tinker to a chance” that maybe they might do something next time.
Gross cites Ray Dalio when he describes the path that policy has defined:
The objective, Dalio writes, is to achieve a “beautiful deleveraging,” which assumes minimal defaults and an eventual return of investors’ willingness to take risk again. The beautiful deleveraging of course takes place at the expense of private market savers via financially repressed interest rates, but what the heck. Beauty is in the eye of the beholder and if the Fed’s (and Dalio’s) objective is to grow normally again, then there is likely no more beautiful or deleveraging solution than one that is accomplished via abnormally low interest rates for a long, long time.
Gross defines what he expects graphiclly, where he sees the post World War II relationships repeated.
Of course during th Post WW II era nominal GDP was quite robust. In the coming years many expect GDP growth to be much more restrained. If the nominal GDP growth rate is 2-3% then the Treasury long-term composite rate would be 0-2% (+/-) if the graph above is correct.
If the Gross view of the financial world is correct a lot of analysts and advisors who are so sure inflation will soon be upon us will be retired before it happens.
Sources:
- Survival of the Fittest? (William H. Gross, Investment Outlook, PIMCO, October 2013))
- PIMCO’s Gross: Look Out for Low Rates Till 2035 (Gil Weinrich, Think Advisor, 03 October 2013)