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Bill Gross: How Cost of Carry Could Change Investor Preference

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Dec. 13 2017, Updated 7:33 a.m. ET

Cost of carry

Bill Gross said in his recent monthly investment outlook, “Our entire financed-based system – anchored and captained by banks – is based upon carry and the ability to earn it.” He believes that in return for cost of carry, if investors get risk-adjusted returns that will be unfruitful compared to the benchmark, they could shift their holdings to other asset classes.

In the earlier part of this series, we saw how lower interest rates have affected investors’ choice to select the US Treasury (TLT) (SHY) as a hedge against the equity market (SPY) (SPX-INDEX).

Moreover, 2017 has been a passive year for bond traders. The graph above illustrates the year-to-date performance of the ten-year bond yield over the past three years. In 2017, the yield has fallen 2% year-to-date compared to the gains in 2015 and 2016.

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Gross also emphasized, “Timing that exit is obviously difficult and perilous, but critical for surviving in a new epoch.” According to Gross, the fall in the ten-year bond yield could be a major concern for investors. He believes the lower interest rate environment and falling yield is affecting the performance of the US Treasury. He also feels it can’t provide insurance as it did in past decades.

In the next part of this series, we’ll see what Gross thinks about bitcoin.

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