What Do Frogs and Bondholders Have in Common?
Put a frog in a pot of water at room temperature and he will try and adapt to his surroundings as the heat is turned up, leading to frogs legs for dinner.
Bill Gross, the co-CEO of PIMCO uses the story to highlight the dangers facing bond investors who have enjoyed solid total returns so far this year.
“Much like the Tower of Babel, Treasury bond prices cannot be heaven bound but have more earthly limitations,” said Gross in his monthly letter to investors.
“Much like gradually turning up the temperature on poor froggy’s kettle of water, monetary policy in developed countries has and absolute return level of yields for the past two and a half years post Lehman Brothers,” he wrote.
“Teeter-totter yields down, teeter-totter prices up, and the froggy’s total return euphoria at present seems to know no bounds. But once the potential for even lower interest rates is minimized by the zero floor, our future frog-legged entrée is left with a rather uncomfortable feeling,” Gross added.
With everyone from the Chinese to the Federal Reserve buying up bonds, Gross believes investors are in for a shock on par with that of a boiling frog.
“Prices are already nearing the boiling point and his coupons are sub zero, CPI adjusted. Total return… and our frog… are cooked, or if not they are certainly trapped in a future low return kettle of water,” Gross said.