Mark R. Kiesel, PIMCO's global head of the corporate bond portfolio management group, claims in a November Global Credit Perspectives update that lower interest rates can't cure structural problems in economies, including high public debt levels in many developed countries and falling capital investment in the US.
"While near-term cyclical challenges may justify increasing activism by global central banks, government debt levels for many developed markets need to be addressed to reduce growing structural barriers to longer-term economic growth," he said.
"Monetary policy will likely not provide a long-term solution to what are ultimately fiscal, political and structural issues. While near-term cyclical challenges may justify increasing activism by global central banks, government debt levels for many developed markets need to be addressed to reduce growing structural barriers to longer-term economic growth," he said.
While Australia's Reserve Bank kept official interest rates at 3.25 per cent on hold earlier this month, many economists expect rates to fall towards 2.5 per cent next year.
William H. Gross, PIMCO's managing director and co-chief investment officer, said despite lower interest rates, US consumers are spending and capital spending is falling.
"Financial repression and quantitative easing were supposed to be the extraordinary monetary policies that kick-started the real economy in the other direction. They have not. We have been using the lower interest rates to consume as opposed to invest," he said.
"Over the past three years, [the US] net national savings rate has been negative, and lower than it has ever been in modern history. The last time this occurred was in the Great Depression," Gross said.
"We are in a 'New Normal' world where the negative effects of private sector deleveraging are only being weakly addressed by monetary and fiscal authorities. If so, then US Treasury yields should stay low," he said.
In contrast, Stefan Keitel, CIO of Credit Suisse, said last week that lowering interest rates globally would restore growth and prompt an equities market rebound, hurting bond prices.
"The central bank measures lower the financing costs of businesses, consumers and not least also of the heavily indebted nations, and thus influence growth directly. The determination evident behind the measures also has a psychological effect and strengthens trust in the markets," Keitel said.
"Equities remain attractive, bonds suffer and gold profits. Risks remain, but are well known and therefore mostly priced in. Setbacks on equity markets should generally be understood as buying opportunities. Bonds are not necessarily dangerous, but don't have much upside potential either."
