The world’s biggest bond fund has sold some of its U.S. government bonds.
The $225 billion Pimco Total Return Fund reduced its U.S. government-related debt from 50 percent to 47 percent in June and upped its holding in corporate debt and emerging markets.
But, it’s not like there was a big move in Treasury bonds last month. In fact, since February, the benchmark 10-year U.S. Treasury yield has stayed in a range between 2.4 and 2.8 percent. Despite the Federal Reserve Bank’s tapering of its bond-buying stimulus program, yields have come down from 3 percent, where they started the year as investors fled geopolitical uncertainty to the relative safety of U.S. Treasury bonds. Lower bond yields are the result of higher bond prices. Thus, Pimco’s Bill Gross may have been taking a little profit.
Katie Stockton, chief technical strategist at BTIG, thinks rates will continue within its current range a little bit longer. “It doesn’t look like a breakout is imminent,” she said. “There is very, very strong support for the 10-year Treasury yield around 2.4 to 2.5 percent.”
As it stabilizes around that level, Stockton believes higher yields may be ahead, but they will hit resistance around 3 percent. For that reason, she thinks Pimco was right to lower its U.S. Treasury portfolio if only just a little bit.
“I do think that it’s correct to be taking down some exposure to Treasury notes here in anticipation of additional stabilization in yields,” Stockton said. “However I don’t think it’s off to the races. The initial resistance, once it does get going, is around 3 percent. Of course, that’s a very psychologically significant number for the 10-year.”
Gina Sanchez, founder of Chantico Global, believes Gross’ latest move has to do with his views on inflation which, in turn affect rates.
“Bill Gross is watching wages,” said Sanchez, a CNBC contributor. “He’s really not watching the job numbers because the job numbers are still very mucked up… there’s so many people that are not counted in those numbers as the participation rate continues to fall. But the wage numbers will tell us if there’s going to be inflation. That’s where investors really need to be watching in terms of looking ahead for the Fed and for the 10-year Treasury.”
“The Fed has to walk a very tight line in terms of managing that inflation and not raising rates such that it derails the recovery,” Sanchez added. “And, quite frankly, the Fed doesn’t have a good track record for not making mistakes. So that’s the concern.”
To see the full discussion on the U.S. 10-year note, with Stockton on the technicals and Sanchez on the fundamentals, watch the above video.