Inside Money: May you live in less interesting times

If the long-term cost of money is close to zero, what's the point in being a bond manager dealing in US government securities? Image / Thinkstock

Writing in the Financial Times online edition this week, Bill Gross, head of investment giant PIMCO, questions the future of the market in which his firm is a dominant player.

As head of the world's largest bond manager, what Gross says is usually noted by investors and governments alike. In particular, Gross was moaning about the effects of persistent long-term low interest rates in the US - rates at which the Federal Reserve recently promised to keep low until 2014 at the earliest.

Essentially, Gross' point was that if the long-term cost of money is close to zero, there's very little point in being a bond manager dealing in US government securities.

"What incentive does a US bank have to extend maturity to a two- or three-year term when Treasury rates at that level of the curve are below the 25 basis points available to them overnight from the Fed?" he asks. "What incentive does Pimco or banks have to buy five-year Treasuries at 75bp when the maximum upside capital gain is 2 per cent of par and the downside substantially more?"

Whatever Gross' doubts, however, investors continue to buy US government securities by the bucketload across all maturity dates. There doesn't appear to be any buyers' strike yet.

Likewise in New Zealand, fixed income investors are still filling their boots with our government bonds. The latest auction figures show the New Zealand Debt Management Office (NZDMO) had no trouble offloading $150 million of bonds of five and seven-year maturities at effective interest rates of between 3.33-3.57 per cent.

If Gross is right, though, investors will become increasingly loathe to dole out long-term money with little prospect of return.

"When all yields approach the zero-bound, however, as in Japan for the past decade and in many developed economies today, then the dynamics may change," he says.