What do bond investors and boiling frogs have in common? Bill Gross thankfully answers the question.
"Put a frog in a kettle of boiling water and he'll jump out faster and further than any of those blue ribbon winners at the Calaveras County jumping frog contest," PIMCO founder Gross writes in his latest monthly commentary. "Put him in a pot at room temperature, however, slowly turn up the temperature to boiling, and you'll have frog legs for dinner. This latter, more unfortunate toad temporarily adapted to his external environment, which seemed like a practical thing to do, until – well, until he reached 212 degrees at which point he was cooked."
Today's bond investors are experiencing a similar fate with nary a "ribbet" of complaint, according to Gross. Much like gradually turning up the temperature on poor froggy's kettle of water, he writes, monetary policy in developed countries has been lowering the temperature and absolute level of yields for the past 2½ years post Lehman Brothers.
"Teeter-totter yields down, teeter-totter prices up, and 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. He's resting inertly in this caldron as prices near the boiling point with the Fed, the Chinese and the banks all buying up whatever Treasury bonds are offered."
