Financial Repression

"Bill Gross of PIMCO can’t say anything these days without creating a big stir in the market—and having his every thought criticized. He probably liked it better twenty years ago when he didn’t have the financial paparazzi trailing him around. That being said, he’s an interesting thinker. Advisor Perspectives carried his most recent letter on financial repression and summarized it as follows:

If the government is going to artificially repress yield, then focus on the parts of a bond that are less repressed! Rather than outright default, many countries attempt rather successfully to keep nominal interest rates lower than would otherwise prevail. Over the long term, this “financial repression” results in a transfer of wealth from savers to borrowers. Investors shouldn’t give their money away, and at the moment, the duration component of a bond portfolio comes close to doing just that – because it doesn’t yield enough relative to inflation.

Financial repression is a term coined by Carmen Reinhart indicating that government bond yields are being artificially held down in order to serve the needs of the government—and their needs are at odds with the objectives of bondholders. Bill Gross thinks the mostly likely outcome down the road will be inflation, but the bond market doesn’t currently agree with him..."

 

at http://systematicrelativestrength.com/2011/06/13/financial-repression/