Bond yields and risk spreads were too low two months ago and global markets that were too levered are now derisking, according to Bill Gross, manager of the world’s largest mutual fund at Pacific Investment Management Co.
Gross’ $285 billion Pimco Total Return Fund led declines among the most-popular bond mutual funds earlier this month after the Federal Reserve sparked a global selloff in bonds by indicating it may start reducing asset purchases known as quantitative easing, or QE.
“In trying to be specific about which conditions would prompt a tapering of QE, the Fed tilted overrisked investors to one side of an overloaded and overlevered boat,” Gross wrote in his July commentary titled “The Tipping Point,” posted on Newport Beach, California-based Pimco’s website.
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Gross’ flagship fund lost 1.6 percent from June 18 through June 20, the day after the Fed outlined its exit scenario, and was down 2.8 percent for the year, the worst of 19 U.S. total return funds with at least $2 billion in assets, according to data compiled by Bloomberg. The $4.2 billion Bernstein Intermediate Duration Portfolio was the third-worst performer this year, after Pimco Total Return and a related fund, falling 2.7 percent.
Bonds, stocks and commodities slumped after Fed Chairman Ben Bernanke put investors on notice the central bank is prepared to begin phasing out one of the most aggressive easing programs in its century-long history later this year. Ten-year Treasury yields climbed to a 22-month high of 2.66 percent on June 24, worsening a selloff that started last month.
U.S. gross domestic product rose at a revised 1.8 percent annualized rate in the first quarter, down from the previous estimate of 2.4 percent, the Commerce Department said. The first-quarter rate was projected to hold at 2.4 percent, according to a Bloomberg News survey of economists.
“The U.S. economy is not sinking, nor are the majority of global economies,” Gross wrote. “Their markets just had too much risk, and in Pimco’s opinion, too much hope for a constant QE and for the growth that it would produce.”
Bond-fund managers from Gross to Jeffrey Gundlach at DoubleLine Capital LP have said now is a bad time to sell bonds because the economy isn’t strong enough to sustain higher borrowing costs. Gross, who trailed peers in 2011 after dumping Treasurys before they rallied, said last week that investors who are selling U.S. government debt now are missing the influence of inflation on the central bank’s decisions.
“The market basically has misinterpreted the growth and unemployment targets while leaving out inflation targets going forward,” he said in an interview on June 19 with Trish Regan and Adam Johnson following Bernanke’s comments.
Gross’ Total Return fund generated annual gains of 7.1 percent over the past five years, outpacing 91 percent of peers, data compiled by Bloomberg show.
Bond funds worldwide have experienced withdrawals this month after Bernanke told Congress on May 22 that the central bank’s policy-setting board could start reducing its bond purchases in “its next few meetings” if the U.S. employment outlook shows sustained improvement.
U.S.-listed bond mutual funds and exchange-traded funds saw record monthly redemptions of $61.7 billion through June 24. The redemptions surpassed the previous monthly record of $41.8 billion, set in October 2008, according to an e-mailed statement by TrimTabs Investment Research in Sausalito, California. Investors withdrew $52.8 billion from bond mutual funds and $8.9 billion from ETFs during the period, said Richard Stern, a spokesman for TrimTabs.
Gross’ fund saw an estimated $1.32 billion leave in May, according to Chicago-based Morningstar Inc., its first withdrawals since 2011. The $4.7 billion Pimco Total Return Exchange-Traded Fund has seen redemptions of $487 million since May 15, according to data from San Francisco-based IndexUniverse.
The total return category includes funds that invest in intermediate-term, investment-grade bonds -- core holdings for investors seeking to put money into fixed income -- and excludes municipal bond funds.
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Gross cut the holdings of Treasurys in the Pimco Total Return Fund to 37 percent in May from 39 percent in April, a level that was the highest since July 2010, according to data on Pimco’s website.
In the latest commentary, Gross advised investors “don’t jump ship now.”
“We may have reached an inflection point of low Treasury, mortgage and corporate yields in late April, but this is overdone,” he wrote.
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