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“Mutual funds, hedge funds, and ETFs, are part of the “shadow
banking system” where these modern “banks” are not required to
maintain reserves or even emergency levels of cash,” Gross said
in his latest Investment Outlook on Tuesday.
“Since they in effect now are the market, a rush for liquidity
on the part of the investing public, whether they be individuals
in 401Ks or institutional pension funds and insurance companies,
would find the “market” selling to itself with the Federal
Reserve severely limited in its ability to provide assistance.”
Gross, who oversees the Janus Global Unconstrained Bond Fund,
said the global markets have benefited massively from trillions
of dollars of liquidity over the past few years stemming from
the Fed's and other major central bank's loose monetary
policies.
Gross said while Dodd Frank legislation has made actual banks
less risky, their risks have really just been transferred to
somewhere else in the system.
With trading turnover having declined by 35 percent in the
investment grade bond market and 55 percent in the high-yield
market since 2005, “financial regulators have ample cause to
wonder if the phrase “run on the bank” could apply to modern day
investment structures that are lightly regulated and less liquid
than traditional banks,” Gross said.
Analysts say the anticipated interest rate hikes by the Fed,
combined with the Fed's ending of bond buying via the ceasing of
quantitative programs in 2014, are exacerbating already thinning
liquidity stemming from tighter bank regulation and a change in
bank business models.
That has magnified price moves in many fixed income markets,
even the generally safe and steady areas such as top-rated
government bonds.
(Reporting By Jennifer Ablan; Editing by W Simon)
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