Pimco's Bill Gross warns discount bonds are set to become 'road kill' from the Fed's quantitative easing plans.
Bonds generally are issued at par, or face value. But there’s a popular category of discount bonds called zero-coupon bonds, which are issued below face value and don’t make regular interest payments. They’ve had a turbulent 12 months as the Fed extended its quantitative easing program but gave a more precise sense of when it could end. Pimco’s own exchange-traded fund, the Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF ZROZ +0.18%, returned 60% in 2011 but ended 2012 with a 1% return. Zero coupon bonds are more sensitive to interest rate changes than other bonds.
Gross, manager of the Total Return Fund PTTRX 0.09%, the world’s largest bond fund, in early January warned that the monetary easing actions of the Federal Reserve, European Central Bank and Bank of Japan were lining the lairs of “inflationary dragons” that will turn bond values to ash. Those worries got fresh fodder on Tuesday when the Bank of Japan said it will adopt an open-ended asset purchase program to stimulate the economy. Read more on the Bank of Japan.
Gross’ alarm over discount bonds may be an extension of that notion, that the massive amount of monetary stimulus dumped into