Pimco's Mather Says Negative Interest Rates Making Things Worseby and
Gross, Mather, Rivelle say central-bank policy will backfire
Central bankers seen as `doubling down' on a failed strategy
Prominent bond managers have a message for central bankers: negative interest rates won’t work.
Bill Gross of Janus Capital Group Inc., Scott Mather of Pacific Investment Management Co. and Tad Rivelle of TCW Group said negative rates won’t stimulate growth and may have adverse consequences for economies and markets. Investors are fleeing bank stocks and other financials as concerns mount that low- and negative-rate policies will prohibit them from making a profit, Gross said.
“Markets sense that and they go down,” Gross, manager of the $1.3 billion Janus Global Unconstrained Bond Fund, said during an interview Thursday at his office in Newport Beach, California. “Finance is leading the charge.”
As central bankers from Tokyo to Stockholm embrace the notion of negative rates, volatility is surging. Far from being buoyed by the measures, global stocks have entered bear market territory and investors have fled to perceived havens such as U.S. Treasury bonds and gold.
The Standard & Poor’s 500 Financials Index fell 3 percent Thursday, the most since Sept. 1, and is down 18 percent this year. Bank of America Corp. lost 6.8 percent on the day and Citigroup Inc. slid 6.5 percent.
Federal Reserve Chair Janet Yellen said the Fed is taking another look at negative interest rates if the U.S. economy falters -- a scenario some investors view as a mounting possibility amid a darkening outlook for world growth.
“In light of the experience of European countries and others that have gone to negative rates, we’re taking a look at them again because we would want to be prepared in the event that we needed to add accommodation,” Yellen said in answering questions during a second day of testimony before Congress.
Gross, who criticized central bankers as being “increasingly addled” in a Feb. 3 note, said they need to come up with new tools to stimulate economic growth because lower rates have failed to do the job. Central bankers’ importance to the global economy has grown because government fiscal policy makers in the U.S. and Europe have balked at using their powers to stimulate growth with deficit spending, Gross said in the interview.
"Keynes is dead,” he said, referring to economist John Maynard Keynes, who advocated public spending as a source of growth. “So the fiscal side is out and monetary policy is increasingly impotent. That’s why markets are going down.”
Negative rates are only on the table because low-rate policies have failed, said Rivelle, whose team runs the $71.7 billion Metropolitan West Total Return Bond Fund.
“Instead of admitting that, central bankers are doubling down,” Rivelle said in a telephone interview from Los Angeles.
Negative rates make conditions worse by pushing people to essentially put money into their mattresses, according to Mather, co-manager of the $89.3 billion Pimco Total Return Fund.
“They’re contractionary,” Mather said during an interview in Newport Beach.
There is growing concern about whether central banks have much ability to help support asset markets, according to Russ Koesterich, global chief investment strategist at BlackRock Inc. As Japanese and European stocks pull back, the suggestion of more stimulus has left investors jaded, he said.
U.S. Treasuries gained Thursday, pushing yields to the lowest in more than three years at one point. Global stocks entered a bear market as the MSCI All-Country World Index fell 20 percent from its high.
“This morning it was crazy,” said Dan Fuss, a veteran manager who helps run the $15.5 billion Loomis Sayles Bond Fund. “It was just going bananas. People were just buying, buying, buying the 10-year” Treasuries in the futures market.
Under a system of negative rates, lenders are charged fees for parking money at central banks. The idea is that banks will use that cash to make loans, jump-starting their economies.
Rivelle said the policy is likely to have the opposite effect in Europe, acting as a tax on banking systems already struggling.
“It could have the consequence of driving up borrowing costs,” he said.
Mather said it was unlikely the U.S. would go as far as Japan or the European Central Bank into negative territory.
“If you did that in the U.S.,” he said, “I’m pretty sure your job as a central banker would last about 24 hours.”
Mather said bankers would be better off pursuing a different set of policies. Financial conditions would more likely rebound, he said, if the Fed said negative rates were off the table or if the ECB said there were limits to how far they were willing to pursue the strategy. He also suggested that central bankers could help the current situation by acquiring assets such as corporate debt.
Once the world’s largest mutual fund, Pimco Total Return beat 65 percent of peers over the past five years. The fund, which Mather runs with Mark Kiesel and Mihir Worah, gained 0.6 percent this year through Wednesday, trailing 69 percent of peers, according to data compiled by Bloomberg.
MetWest Total Return outperformed 81 percent of peers this year and 96 percent over five years. Rivelle oversees the fund with Stephen Kane, Laird Landmann and Bryan Whalen.