Treasuries Decline on Concern Pimco May Sell U.S. Debt

Treasuries fell on speculation the exit of Bill Gross from Pacific Investment Management Co. may prompt the world’s biggest manager of bond funds to shift away from U.S. government debt.

Janus Capital Group Inc. said in a statement today that it hired Gross to manage a global bond fund. Treasuries and government-related securities are the biggest holdings in the $222 billion Total Return Fund that was managed by Gross at Pimco for almost three decades. Hedge-fund managers and other large speculators raised bearish bets on Treasury two-year notes to the most in more than seven years, according to Fed data.

Gross has “been a bond bull for most of his career, and during that time bonds have been in a bull market -- maybe the next Pimco bond managers won’t be as bullish,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 22 primary dealers that trade with the Federal Reserve. “He’s been the face of the bond market for some time. It’s hard to attribute the move in the market to anything else.”

Treasury 10-year note yields rose three basis points to

2.53 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.375 percent note maturing in August 2024 fell 7/32, or $2.19 per $1,000 face value, to 98 21/32.

Bond prices fluctuated earlier after a report showed U.S. economic growth in the second quarter matched the forecast in a Bloomberg survey.

Asset Outflows

Futures bets on Treasury two-year notes in the week ending Sept. 23 increased to a 160,427 net-short position, the biggest since May 2007, according to U.S. Commodity Futures Trading Commission data. Net shorts, or bets prices will drop, were 96,810 a week earlier. Traders were net long as recently as Sept. 5.

Pimco’s Total Return Fund has gained 3.59 percent this year, trailing 57 percent of its peers, according to data compiled by Bloomberg. Last year it lost 1.9 percent, the most since 1994, trailing 65 percent of competitors.

“We expect asset outflows in the order of 10 percent-30 percent,” Thomas Seidl, London-based analyst at Sanford Bernstein, wrote in a note to clients. “We would expect a good deal of Pimco clients switching to Janus, simply attracted by the long track record of Bill Gross.”

Gross’s departure sparked a selloff in markets from credit derivatives to the Mexican peso. Mexico’s currency dropped to the lowest since February, while yields rose on Italian and Spanish government debt, on which Pimco has an overweight position.

‘Some Confusion’

The Markit CDX North American Investment Grade Index, the credit-swaps benchmark that’s one of the most actively used financial instruments in debt markets, jumped 2.5 basis points to 64.1 basis points, according to prices compiled by Bloomberg.

“When a major figure in the fixed-income markets like Bill Gross makes a change, it causes some confusion and uncertainty to those who are observing it from a distance,” said Ward McCarthy, chief financial economist at primary dealer Jefferies LLC in New York.

Amid Gross’s exit, Pimco’s Global StocksPlus & Income Fund slipped 5.7 percent, while the firm’s High Income Fund decreased

6.1 percent. The Pimco Corporate & Income Opportunity Fund slid

6.6 percent and the Total Return ETF declined 0.3 percent.

‘Big Surprise’

Gross’s departure was “a big surprise,” said Jack Malvey, the chief global-markets strategist at Bank of New York Mellon Corp. “He loves the capital markets and will be in it until he can no longer be in it. There are so many things he’s been correct on over the years.”

Gross, who co-founded Pimco, had reduced Treasuries and government-related debt in his flagship fund during August to 41 percent, versus 45 percent in July, data posted earlier this month on the company’s website showed. That compared with 50 percent in May, the highest level since July 2010.

The 70-year-old sold most of the $48 billion of U.S. Treasuries held by his fund in the second quarter, replacing them with about $45 billion of futures, according to an August filing. The contracts require small up-front payments, freeing up money for Gross to invest in higher-yielding securities including Brazilian, Spanish and Italian debt.

Gross had been betting on shorter-term Treasuries with a view that the Fed won’t raise interest rates too soon. The securities, which are sensitive to investor expectations of monetary policy, have underperformed longer-term debt as signs of U.S. economic improvement have bolstered the case for rate increases.

Fund Withdrawals

Treasuries due in one to five-years have returned 0.8 percent this year, while Treasuries due in 10 years or more returned 15 percent since January, according to Bloomberg U.S. Treasury Bond Index.

The Total Return Fund had $3.9 billion of net investor withdrawals in August, the 16th straight month of redemptions that began in May 2013 as performance faltered, Chicago-based researcher Morningstar Inc. said Sept. 3 in an e-mailed statement. The withdrawals brought the fund’s assets down from $293 billion last year.

“There are concerns that they are going to liquidate his fund or redemptions are going to come in that are going to weigh on Treasuries,” said Thomas di Galoma, head of fixed income rates at ED&F Man Capital Markets in New York. “He was heavily weighted in the Treasury market. That’s certainly weighing on the Treasury market. People perceive there will be liquidations and they are trying to get in front of it.”

Gross will begin managing the Janus Global Unconstrained Bond Fund from Newport Beach on Oct. 6. Denver based Janus managed $178 billion as of June.

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