During an interview on Countdown to the Closing Bell, Janus Capital Portfolio Manager Bill Gross explained how negative interest rates impact the banks and the economy.
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“My point was not to pick on the banks in particular, but to suggest simply that lower interest rates, negative interest rates and indeed what we call flat yield curves—that is a relatively tight spread between money market rates and 10-year Treasuries—it’s a negative for banks. They wish the spread was much higher."
He continued saying: “In other words, they wish that interest rates were higher because their margins are dependent upon a certain historic spread and now banks are suffering because they themselves can’t earn enough money. It’s not a collapse, it’s just a new model going forward in which financial institutions can’t earn what they used to earn and so the prices have to be adjusted to take that into consideration.”
But, Gross said he can’t put the blame on the Fed.
“It’s hard to fault them because history’s on their side,” he said. “Janet Yellen, Ben Bernanke and [Alan] Greenspan before them all lowered interest rates when the times were troubled, when markets were sinking. Ultimately, when you get down to zero or into the negative territory, it seems that the rules change. The savers—the business-modeled companies such as insurance companies and banks and pensions funds—ultimately they can’t earn enough money to do well, and in some cases survive. That’s why Puerto Rico, Detroit and other entities are beginning to crumble because they’ve over-promised yes, but they’ve also under-invested in terms of their ability to earn.”
The “bond king” said zero rates could also impact insurance giants such as MetLife (MET), Prudential Financial (PRU) and Hartford Financial (HIG), among other companies in the sector. Gross cautioned, but did not say to stay away from the names.
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“Just be cognizant that their ability to earn money and to grow earnings is impaired going forward. It doesn’t mean they’re going under—they’re not. They’re very stable, strong companies in terms of balance sheets. But, earnings going forward will be hampered.”
On the 2016 presidential race, Gross said he wants to see fewer attacks among the candidates.
“I hope the conversation becomes more intellectual as opposed to personal,” he said.