Gross Says Stay in Shorter-Maturity Debt After Yellen Roils Bet
Pacific Investment Management Co.’s Bill Gross recommends staying in bonds maturing in five years and less even after comments last month from Federal Reserve Chair Janet Yellen sent shorter-maturity yields surging.
“The 1–5 year portion of the curve, beaten up recently due to Fed ‘blue dot’ forecasts and Yellen’s ‘six months after’ comments, should hold current levels if inflation stays low,” Gross wrote in his monthly investment commentary on Newport Beach, California-based Pimco’s website. “But 5–30 year maturities are at risk.”
Gross’ $232 billion Total Return Fund has lost 0.83 percent over one month, ranking it in the bottom 3 percentile versus other comparable funds, according to data compiled by Bloomberg. That has helped to drop the average annual return over five years of the world’s biggest bond fund to 6.8 percent, placing it in the 56 percentile.
Two-year Treasury note yields surged the most since 2011 on March 19 after central bank officials increased their projections for the main policy rate and Yellen signaled a rate increase may come six month after the central bank completes its bond buying, expected to be in the fall.
The median estimate by Fed officials was for the fed funds rate to move to 1 percent in December 2015 and 2.25 percent a year later, that compares to estimates in December of 0.75 percent and 1.75 percent respectively, according to their summary of economic projections which are represented by blue dots. An updated SEP, as the report is known, had a median estimate for the long-run policy rate was 4 percent, unchanged from the December report.
“Probabilities suggest that as the Fed completes its taper, the 5-30 year bonds that it has been buying will have to be sold a higher yields to entice the private sector back in,” Gross wrote.
The Federal Open Market Committee opted for a third $10 billion cut in monthly bond buying to $55 billion at their March meeting. The central bank has kept its benchmark rate for overnight loans between banks in a range of zero to 0.25 percent since December 2008. The Fed also discarded its 6.5 percent jobless rate threshold while adopting qualitative guidance for signaling when it will consider raising the benchmark interest rate.
Gross’ fund produced the worst risk-adjusted return over the past year among 16 U.S. intermediate-term funds with at least $5 billion in assets, according to the BLOOMBERG RISKLESS RETURN RANKING. As shorter-term debt tumbled in anticipation of rising interest rates, the fund posted the second-worst returns and second-highest volatility in the group.
Pimco Total Return Fund’s volatility was 4.3, compared with the 3.6 average for the group. Over the past five years, Pimco Total Return’s risk-adjusted return ranked 10th out of the 15 funds that have been in existence since then.
“Because 2014 should be a relatively positive growth environment, carry trades in credit, curve and volatility should produce attractive Sharpe/information ratios,” Gross wrote referring to a gauge of a security’s return relative to risk as measured by volatility developed by William F. Sharpe. “High Sharpe ratios have been due to a long-term bull market. They will move lower in future years, as will asset returns.”
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