Bridgewater’s Prince Says Bonds Are Risky in Zero-Rate World

(Bloomberg) -- Investors are underestimating the risks lurking in near-zero interest rates on bonds, according to Bob Prince, co-chief investment officer at Bridgewater Associates, the world’s largest hedge fund.

While government and high-grade corporate debt have traditionally been places to hold wealth, the extreme low-interest world brought on by the Covid-19 pandemic has upended their role, Prince said in a Bloomberg Television interview Friday.

“If there is no interest rate, that means there is no discount rate on cash flows,” he said, adding there are now “asymmetric” risks to holding high-quality bonds, with the downside risk far outweighing the potential gains.

In June, Prince said the impact of the pandemic could last 18 to 24 months, complicating monetary and fiscal efforts aimed at bolstering the economy.

Prince made his comments as reports showed on Friday that the U.S. labor market continued to regain ground in July, though at a slower pace, indicating the economic rebound is still making headway despite a surge in coronavirus infections. Employment remains about 13 million below the pre-pandemic level in February, when the recession officially started, the July data show.

Bond losses could far outweigh their potential gains if inflation should pick up or real yields rise from their current depressed levels, Prince said -- which could happen in an economic recovery. He said such a scenario would be “mind-blowing.”

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