Pimco's Gross: Central Banks Are Where Bad Bonds ‘Go to Die’

Tuesday, 18 Sep 2012 10:50 AM

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Ultra-loose monetary policies should send investors ditching lower-quality bonds and flocking toward higher-quality debt, as weak debt won’t survive in today’s environment, said Bill Gross, founder of Pimco, manager of the world’s largest bond fund.

The Federal Reserve announced recently it will buy $40 billion a month in mortgage-backed securities held by banks to hasten the pace of U.S. recovery and encourage job demand.

Such a policy tool, known as quantitative easing, aims to spur growth and job demand by flooding the economy with liquidity in a way that pushes down interest rates across the economy to encourage investing and hiring, which makes conditions ripe for gains in stock and commodities markets.

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

Such policies keep interest rates low at present but arguably pump up inflation rates down the road, a combination that won’t allow unhealthy fixed-income venues to survive.

The European Central Bank (ECB) and central banks in Asia have carried out similar policies, creating a global monetary system flush with liquidity today.

“Central banks are where bad bonds go to die. Sell bad bonds, buy good ones. Investing sometimes can be very simple,” Gross said in a posting on Pimco’s Twitter account.

While investors flock to equities markets amid times of monetary loosening, some urge not to abandon all bond venues on fears inflation will strike and bruise the asset class, but rather, take a longer-term approach to central bank action.

“Don’t fight the Fed or the ECB for the next four to six months,” said Nick Beecroft, chairman and senior market analyst at Saxo Bank, according CNBC.

“It’s going to pump things up, but economic reality will catch up, so be fleet of foot.”

Editor's Note: This Wasn’t an Accident — Experts Testify on Financial Meltdown

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