Bloomberg News

‘Helicopter Ben’ May Deter Lending With Lower Rates, Gross Says

September 06, 2011

Sept. 7 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke risks causing a decline in longer-term lending by holding down benchmark interest rates, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said in an opinion piece on the Financial Times website.

If the Fed seeks to drive down longer-maturity yields, as some are anticipating, then the central bank may “destroy leverage and credit creation in the process,” Gross wrote in the piece, which was titled “‘Helicopter Ben’ Risks Destroying Credit Creation.” The Fed on Aug. 9 pledged to keep the benchmark rate near zero until at least mid-2013.

“Borrowing short-term at a near risk-free rate and lending at a longer and riskier yield has been the basis of modern-day finance,” Gross wrote. “The further out the Fed moves the zero bound towards a system-wide average maturity of seven to eight years the more credit destruction occurs.”

The Fed may decide at its Sept. 20-21 meeting to replace short-term Treasury securities in its portfolio with long-term bonds in a bid to lower rates on everything from mortgages to car loans, according to economists at Wells Fargo & Co., T. Rowe Price Associates Inc., Barclay’s Capital Inc. and Goldman Sachs Group Inc. Bernanke is scheduled to speak on the U.S. economic outlook tomorrow in Minneapolis.

The Treasury 10-year note yield slid yesterday to a record 1.9066 percent. It rose to 2 percent as of 10:47 a.m. in Tokyo.

The extra yield investors demand to buy 10-year notes instead of 2-year debt narrowed yesterday to the least since March 2009. The gap was at 1.80 percentage points today after touching 1.71 percentage points yesterday.

Bernanke, in an Aug. 26 speech to an economic conference at Jackson Hole, Wyoming, said the central bank has a “range of tools that could be used to provide additional monetary stimulus.” The costs and benefits of those tools would be debated more fully at the Fed’s Sept. 20-21 meeting.

--Editors: Garfield Reynolds, Nate Hosoda

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Garfield Reynolds in Sydney at greynolds1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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