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Investors lulled into ‘dreamland’ by central banks, warns Bill Gross

Investors are living in a “dream land” as a result of global central banks’ decisions to continue to drive the world economy even as it has recovered strongly from the pandemic. Bill Gross said.

Historically low interest rates and massive bond-buying programs, now only cautiously scaled back, have fueled a wave of widespread financial euphoria in everything from stocks to assets. digital like “token is not replaceable,” the founder of bond investment giant Pimco, told the Financial Times in an interview.

“It’s dangerous,” Gross warned of accommodative central bank policy. “Those are all interest-backed dream lands that aren’t where they should be.”

U.S. inflation, already hotter than the Federal Reserve had expected, accelerated to highest in three decades was 6.2% in October. Price growth is also outpacing targets in other global economies, including the UK. That has exacerbated fears that central banks will need to act sooner and more aggressively than previously indicated.

Gross’s comments on the financial outgrowth echo a call from Christian Sewing, Deutsche Bank chief executive, who said on Monday that central banks should tightening monetary policy to provide “countermeasures” against rising inflation.

Gross, who is now retired, said he was skeptical inflation would continue at this high or accelerate further. However, he predicts that it is likely to be much higher than the Fed’s 2% target in the near future.

However, Gross questioned whether raised and other central banks will – or may even – tighten monetary policy in a meaningful way to overcome fiscal excesses and inflationary pressures because of the risk of causing sufficient market damage. to promote economic recovery.

“There’s not much they can do,” he said. “I think [Fed chair Jay Powell] attracted to the financial markets, and so he will gradually give up buying bonds, and next year he will probably gradually increase interest rates. ”

Although inflation is accelerating in most of the top countries as a result of supply chain disruptions and the robust economic recovery following the Covid-19 shock, the global bond market has largely remained depressed. settle.

Yields on short-term government bonds have spiked in recent weeks as investors begin to price in the likelihood or the likelihood of interest rates rising, but long-term yields have largely remained at record lows.

“Inflation readings in the near term can be intimidating for ‘inflationists’. . . this could prompt central banks to at least discuss a more responsive function than this year’s slower response function so far,” said Rick Rieder, Investment Director of Fixed Income determined at BlackRock, said last week. “However, it is likely that in time the pandemic distortion and extreme baseline effects will subside,” he added.

Yields on the benchmark 10-year Treasury note edged higher in response to strong US inflation data released last week, but at around 1.6% it remains exceptionally low. shows that many bond investor still think the current inflation rate is a spike that will eventually pass.

But Gross – who now mainly manages his own funds – remains worried about the long-term impact of the past decade’s currency experiment with low or even negative interest rates, coupled with bond-buying programs. vast now totaling $23 billion as of 2008.

The prolonged period of low interest rates has caused serious pain for savers, says Gross. “One of these days, one of these years, or one of these decades, the system will collapse, because capitalism depends on savers and investors.”

The reporter for this story can be reached at robin.wigglesworth@ft.com and on Twitter at @robinwigg.

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