What The Heck Is The Cause Of G-Bonds Record Low Yields?

Bill Gross has a fairly simple explanation for Benchmark Government-Bond Yields falling to record lows: weak bank lending.

The fixed-income expert, who manages an unconstrained bond fund for Janus Global Capital, made the case on Wednesday in a monthly market report that a lack of lending by the world’s big banks is hemming in credit and hobbling economic growth here and abroad.

Gross says highly levered economies are dependent on credit for its “stability and longevity.” He said banks and, specifically the credit they provide, are the financial lubricant that keeps the system chugging.

But negative and record-low interest rates are gumming up the economic works. Although lower interest rates have encouraged spending, that trend is sputtering as central banks run out of tools after printing money and helping to drive trillions of dollars worth of sovereign bonds—some $11.7 trillion by Fitch Ratings’ count—into negative territory. Impeded by tough regulations designed to curb the same risk-taking habits that helped to lead to the 2008 financial crisis, banks have become increasingly hesitant to lend, especially as worries about anemic growth persist.

The upshot?

Genuine appetite for risk has waned, which has resulted in record low yields for government debt, including the benchmark 10-year U.S. Treasury note . The T-note touched a record intraday low of 1.321% Wednesday and other government paper hit new nadirs.

Gross’s comments, which resemble his earlier warnings about negative rates, follow a wave of worry in global markets sparked by the Britain’s decision to exit the European Union.

Concerns about the aftermath of Brexit and its affect on the rest of Europe’s trade bloc has fueled some of the more recent gyrations in government bonds and whipsawed stocks, namely the Dow Jones Industrial Average and the S&P 500 index , which were turning higher Wednesday afternoon in New York.

Drawing parallels to the board game Monopoly, in his letter, Gross says investors should be more wary of the return “’of’ their money rather than the return ‘on’ their money” as they navigate the negative-yielding landscape.

This article first appeared on Markets Stream.

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