Influential bond investor Bill Gross of Janus Henderson Investors said on Monday that financial markets are artificially compressed and capitalism distorted because of the U.S. Federal Reserve‘s loose monetary policy.
“I think we have fake markets,” Gross said at a Janus Henderson event.
Investors should brace for higher Treasury bond yields as the Fed begins to unwind its quantitative easing program but yields will edge up “only gradually,” he said.
Gross, who oversees the $2.1 billion Janus Henderson Global Unconstrained Bond Fund, said the Fed’s loose monetary policy had resulted in investors chasing yield and thus producing tight corporate spreads everywhere around the globe.
“Even China and South Korea – perfect examples of the risk trade – are at very narrow (corporate spread) levels. There is no real advantage in the global marketplace. Everything is so tight, it is hard to pick a winner from a group that is fake.”
Gross reiterated his warning that Fed Chair Janet Yellen and other global policy makers should not rely on historical models such as the Taylor Rule and the Phillips curve “in an era of extraordinary monetary policy.”
Economists John Taylor and A.W. Phillips devised models for guiding interest-rate policy based, respectively, on inflation and the unemployment rate. Those models disregard the importance of private credit in the economy, according to Gross.