Bill Gross Favors Short Treasuries as Yellen to Hold Rates

Pimco Co-Chief Investment Officer Bill Gross
Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO), recommended short-term Treasuries in his monthly investment outlook report Sept. 5. Photographer: Andrew Harrer/Bloomberg

Bill Gross, who has been telling investors to favor short-term Treasuries, is following through on his own advice as longer-maturity bonds suffer their biggest losses in four years.

Gross cut the duration of holdings in the $250 billion Pimco Total Return Fund, the world’s biggest bond fund, to 4.42 years as of Sept. 30 from 5.06 years a month earlier, according to a report yesterday on Pacific Investment Management Co.’s website. Bonds due in one to five years made up 70 percent of holdings, the Newport Beach, California, company reported.

Short-term Treasuries are little changed in 2013 on speculation the Federal Reserve under Janet Yellen will keep interest rates at a record low to spur the economy. Longer-term securities have plunged as investors push forward forecasts for when the Fed will raise its overnight benchmark, while betting the policy will spur inflation. President Barack Obama nominated Fed Vice Chairman Yellen yesterday to succeed Chairman Ben S. Bernanke when his term ends on Jan. 31.

“It’s front-end friendly,” Gross said yesterday in an interview with Bloomberg, referring to the shorter-term securities among the spectrum of Treasury maturities. “Anything that is anchored to the policy rate -- and the policy rate being something that probably is going to be 25 basis points for at least the next several years -- anything that’s anchored to that will do well and had done well.”

Shorter Securities

Treasuries due in a decade and longer have tumbled 10 percent in 2013, the first loss since 2009, according to a Bank of America Merrill Lynch index. Two-year notes gained 0.1 percent, the data show.

“Perhaps 10- and 30-year Treasuries, which are subject to inflation and reflation, which is basically what this policy of Janet Yellen’s is going to attempt to do, those particular maturities are probably negatively affected,” Gross said, speaking yesterday with Trish Regan and Adam Johnson on Bloomberg Television’s “Street Smart.” Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.97 trillion as of June 30.

Investors saw a 30 percent chance that policy makers will increase the key interest-rate target to 0.5 percent or more by January 2015, based on data compiled by Bloomberg from futures contracts yesterday. The odds have declined from 64 percent a month earlier. The Fed has kept the rate at zero to 0.25 percent since 2008.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was at 2.22 percentage points. Annual consumer-price inflation was 1.5 percent in August.

Benchmark Yield

Benchmark U.S. 10-year yields rose three basis points, or 0.03 percentage point, to 2.70 percent as of 7:13 a.m. in London, according to Bloomberg Bond Trader prices. The price of the 2.5 percent note maturing in August 2023 fell 9/32, or $2.81 per $1,000 face amount, to 98 10/32. While yields have climbed from a record low of 1.379 percent in July 2012, they are below the average of about 6.40 percent since September 1981, the start of the three-decade bull market in bonds.

Gross, the co-chief investment officer at Pimco, also recommended short-term Treasuries in his monthly investment outlook report Sept. 5.

Duration, which can be controlled by adjusting the maturity of debt holdings, measures sensitivity to changes in bond yields. A shorter duration is a more bearish position, because it will provide protection if yields rise.

Debt Limit

Treasury Secretary Jacob J. Lew has said the U.S. may not be able to make its debt payments starting Oct. 17 unless lawmakers and President Barack Obama agree to raise the federal borrowing limit, sending some bill yields higher.

Rates on bills due on Oct. 17 climbed to 0.49 percent yesterday. The yield was negative as recently as Sept. 26.

“We have avoided maturities in the time period toward the end of October,” Nancy Prior, the president of money markets at Boston-based Fidelity Investments, said in an interview yesterday. Fidelity is the largest manager of U.S. money funds with $427 billion in assets as of Aug. 31, according to Crane Data LLC in Westborough, Massachusetts.

As Fidelity has sought to avoid Treasury bills maturing near the deadline, Pimco has been buying as their yields have risen, according to Gross.

“Their selling begets opportunistic buying on the part of Pimco,” he said yesterday on Bloomberg Television. “We’re picking up pennies on the street. This is a particular penny that we think is risk-free.”

Pimco Holdings

Gross kept holdings of Treasuries and other U.S. government-related debt unchanged at 35 percent of assets in his September, the report on the Pimco website yesterday showed. Mortgage securities declined to 35 percent from 36 percent.

Over the past five years, the Total Return Fund has returned 7.88 percent annually on average, outperforming 84 percent of competitors, according to data compiled by Bloomberg. It lost investors 1.84 percent this year, outperforming just 44 percent of its peers, the data show.

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