Pimco Says 10-Year Note Losses Not a ’Slam Dunk’ in Bond Outlook
Pacific Investment Management Co., manager of the world’s biggest bond fund, projects Treasury 10- year notes will return 2 percent to 3 percent per year during the next 10 years, trailing the average of the past decade.
The security returned an average of 5.3 percent during the past 10 years, according to a Bank of America Merrill Lynch index. The return was 4.2 percent in 2012, down from 20.1 percent in 2008.
U.S. government yields have plunged to record lows as the economy struggles to grow amid a phenomenon Pimco officials call the “New Normal” of sluggish growth and below-average investment returns. The company said slow growth means Treasuries investors won’t be pummeled by falling bonds prices and restrained inflation indicates real returns adjusted for changes may be greater than zero.
“It’s not a slam dunk that low yields equal negative returns,” said Saumil Parikh, a money manager and member of the investment committee at the Newport Beach, California-based company, in a telephone interview yesterday. “You would need a rapid improvement in the economy and in interest rates, which is unlikely to happen.”
The benchmark note is projected to deliver an average total return ranging from 2 percent to 3 percent, he wrote in an investment report issued today. When adjusted for inflation, predicted by Pimco to rise 2 percent this year and 2.5 percent in 2014, the real yield on the 10-year note drops to zero to 0.5 percent.
“The comparison is your cash is likely to earn between negative 1 and negative 2 percent after inflation,” Parikh said.
The yield on the 10-year note reached a record low of 1.379 percent in July. It traded at 1.87 percent today, according to Bloomberg Bond Traders prices. Economists forecast it will end 2013 at 2.25 percent, climbing to 2.61 percent by the end of the second quarter of 2014, according to the median estimates in a Bloomberg News survey.
“We expect the Federal Reserve to keep interest rates low for a very extended period of time, and that’s different from what the market expects,” Parikh said, adding that the rate will remain at the current level beyond 2015.
Bill Gross, manager of the world’s biggest bond fund, said Feb. 27 asset-price irrationality is rising after years of record low benchmark interest rates by the Fed. The level of asset prices signal investors should be cautious and the degree of irrationality is about six on a scale of one to 10 and rising, Gross wrote in his monthly investment outlook posted on Pimco’s website.
“Corporate credit and high-yield bonds are somewhat exuberantly and irrationally priced,” Gross wrote. “Spreads are tight, corporate profit margins are at record peaks with room to fall, and the economy is still fragile.”
Pimco increased the proportion of U.S. government and Treasury debt in the $288.2 billion flagship Total Return Fund (PTTRX) to 30 percent in January, a six-month high, from 26 percent of assets in December, according to a report on the company’s website. The fund doesn’t comment directly on monthly changes in its portfolio holdings.
Pimco has been advising investors to purchase five-year Treasuries and inflation-indexed debt as central banks implement low interest-rate policies globally. The firm has suggested investors should avoid longer-term securities due to the risk of future inflation.
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