Bond Gurus Uneasy Over Debt but Not Alarmed
Worries about the rapid rise in U.S. government and household borrowing in recent years haven’t been lost on Bill Gross or Larry Fink, two of the world’s biggest bond investors.
At a financial conference at UCLA last week, the two men acknowledged that they were uneasy about certain elements of the debt boom, particularly the rising U.S. dependence on foreign creditors.
But neither Gross, chief investment officer at Newport Beach-based Pacific Investment Management Co., nor Fink, chief executive of BlackRock Inc. in New York, expressed concern that the game soon might be up -- that foreign investors would decide that U.S. bonds and other securities weren’t worth the money, leaving the American economy suddenly desperate for capital.
One simple factor that still favors the U.S. as a capital importer is that its government bonds continue to pay much more than bonds in Europe or Japan, Fink noted.
The annualized yield on the 10-year U.S. Treasury note was 4.52% on Friday. By comparison, a 10-year British government bond was paying 4.18%. A German government bond of that term was paying 3.49%. The yield was 1.59% on a 10-year Japanese government bond.
But with the European and Japanese economies apparently picking up speed while China and other emerging economies continue their booms, the key question is whether governments and private investors in those places will begin to find more lucrative investment opportunities within their own borders, Fink said.
“What happens if [those] economies continue to do very well?” Fink asked. “You don’t want to be the debtor nation we are if that’s the case.” At a minimum, he said, “we’d have higher interest rates” to compete with foreign rivals.
Unless, of course, China, Japan and other major exporters of capital continued to see U.S. investments as politically and economically expedient -- a way to keep Americans consuming foreign imports.
In any case, the extent of foreign investor control over the U.S. economy’s fortunes is a cold reality, Gross said.
“We are at the disposal of the kindness of strangers,” he said.
Looking longer term, Gross said he remained inclined to believe that the world economy was more likely to face disinflation than inflation as global competition keeps prices down. That could help keep long-term interest rates relatively subdued, he said.
Fink said he was more concerned about the potential for a pickup in inflation and interest rates if the global economy continued to expand. “I’m probably a little more constructive on the world and economic growth,” he said.
In terms of the outlook for capitalism and economic opportunity, “I think the world is a much safer place than people realize,” Fink said.
