Pimco’s BOND Losing Assets For First Time

Cinthia Murphy
June 6, 2013

 

The Pimco Total Return ETF (BOND) broke its impressive asset-gathering streak with its first monthly outflows ever in May. Those losses have been compounded by BOND bleeding $119 million in the first five days of June.

The milestone isn't all its own. Its mutual fund counterpart, Pimco's flagship $292 billion Total Return Fund (PTTAX) is going through the same challenge. May registered as the first month when outflows outpaced inflows since 2011, and the investor exodus doesn't seem to be tapering off there either.

In a very broad sense, Federal Reverse Chairman Ben Bernanke's policies have been bad for Bill Gross' business—something Gross himself has been quick to point out.

The easy-money measures Bernanke has implemented have led to paltry yields in U.S. government debt in a low-rate environment that all but spelled out the end of the 30-year bond rally.

Gross himself has suggested before that the long-standing bond rally might be coming to a halt. BOND has now dropped 0.8 percent year-to-date after losing 2 percent in the past month alone. And investors have been listening, with many looking outside of the traditional bond market for sources of income, particularly in alternative assets.

But the broader issue is that the "zero-based" policy rates and quantitative easing around the globe—as Gross put it in a piece published on Barron's this week—might be on path to sucking the life out of the economy. The "bond king" argues that the Fed policy is keeping yields low and trimming rewards often associated with riskier investments, capping business—and ultimately economic—growth.

Gross goes on to make the point that just as profits are critical to capitalism, so too is return—or "carry"—to financial markets. That "carry," Gross said, can come in many forms, such as equity risk premium or liquidity premium, or the carry that comes from extending duration in a bond portfolio.

"There are numerous ways to earn 'carry, the combination of which for an entire market of investable assets constitutes a good portion of its 'beta' or return relative to the 'risk free' rate, all of which may be at risk due to artificial pricing," Gross said in the piece published in Barron's.



 

His colorful language is unsurprising given that renewed concerns about just how the Fed intends to unwind this monetary easing, and how soon it will do it, have been detrimental to the bond market lately, pushing yields higher on longer-dated debt.

In particular, Treasurys—those same securities that make up about 20 percent of BOND's portfolio—and mortgage-backed securities, or MBSs, have been hit recently. Mortgage-backed securities account for about 30 percent of BOND's portfolio.

Those securities comprise the $85 billion in debt the Fed has been buying every month in an effort to shore up the economy. The unwinding of the Fed's quantitative easing should lead to higher borrowing costs longer term as rates rise—the longer dated a bond is, the more price sensitive it is to changes in interest rates.

In the past month, yields on 10-Year Treasury notes rose 16 percent—or 28 basis points—to their 2.05 percent level today. Those yields went as high as 2.164 in late May before receding slightly—their highest level since April 2012, according to Yahoo Finance data. Yields move inversely to prices, meaning the higher they go, the lower bond prices are.

"In the bond market—interest rates, risk spreads, volatility and liquidity premiums are all significantly less than they were five years ago during the financial crisis and, in many cases, less than they have ever been in history," Gross said. "Never have investors reached so high in price for so low a return."

BOND hasn't been the only bond ETF suffering in the current environment, but the fact that it is one of the quickest-growing ETFs ever makes its recent slowdown particularly noteworthy, even if it's not out of the ordinary, as IndexUniverse's Gene Koyfman said.

"One month of poor performance when the rest of the bond market also was on a skid isn't much to write home about," Koyfman said. "If you're investing in BOND, it's because you believe in Gross' team."

The fund, which gathered its first $1 billion in assets in less than three months after it launched, has $4.9 billion in assets today.

 

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