The monthlong selloff in U.S. Treasury bonds is pushing the
Pimco Total Return Fund, run by Bill Gross of Pacific Investment
Management Co., toward its worst monthly loss since the financial
crisis.
The $292.9 billion bond fund, the world's largest, posted a
negative return of 1.9% this month through May 30. That compares
with a loss of 1.62% from the Barclays U.S. Aggregate Bond Index,
according to data from fund tracker Morningstar.
The fund is on pace for its biggest monthly loss since September
2008, and ranked 159 out of 174 intermediate-term bond funds
tracked by fund tracker Lipper.
"It has been a painful May for Gross," said Jeff Tjornehoj, head
of Americas research at Lipper.
Mr. Tjornehoj said the loss signaled that Mr. Gross didn't
"substantially get out of Treasurys," though he added that Mr.
Gross might have cut exposure to longer-dated Treasury bonds that
bore the brunt of the selloff in May.
Mr. Gross, founder and co-chief investment officer of Pimco, a
unit of Germany's Allianz SE (ALIZF, ALV.XE), didn't immediately
respond to questions regarding the fund's performance.
But in a message from Pimco's Twitter feed Friday, Mr. Gross
wrote that Pimco "likes" five-to 10-year Treasury bonds, a sign he
is not deterred by the selloff in May.
Mr. Gross's fund still holds a solid long-term record.
It posted a loss of 0.15% this year through May 30, still better
than the 0.74% loss from the benchmark. On average, the fund has
posted an annualized return of 7% over the past 15 years, beating
5.7% from the benchmark.
Mr. Tjornehoj sees the May loss as just a blip, arguing that
"comeback is part of Gross's repertoire," as evidenced by the
fund's solid long-term record.
Mr. Gross is not alone in feeling the pinch. All
intermediate-term bond funds tracked by Lipper posted negative
returns in May, with an average loss of 1.5%.
Mr. Gross's fund was beaten harder than many of its peers due to
heavy concentration of the portfolio on Treasury bonds and
mortgage-backed securities--the two markets that have been hit hard
due to fears of losing support from the Federal Reserve, which has
been purchasing $85 billion of bonds each month in a bid to make
credit more available throughout the economy.
Treasury bonds and mortgage-backed securities accounted for 73%
of Mr. Gross's fund at the end of April, according to the latest
data available on the company's website.
Fears that the Fed would soon step away have been a key driver
fueling a rush out of Treasury bonds this month and pushed up
yields to a 14-month high. Bond prices fall when their yields
rise.
The selloff in Treasury bonds rippled through fixed-income
markets, pushing yields higher and prices lower on corporate bonds,
mortgage-backed securities and municipal bonds.
The selloff in May was a blow to Mr. Gross, who in early April
told The Wall Street Journal that he turned bullish on the 10-year
Treasury note after shunning the maturity for months.
Mr. Gross boosted holdings of Treasury bonds in April to the
highest in over a year, betting that monetary stimulus from the Fed
and the Bank of Japan would keep bond yields low.
The strategy worked well in April. The 10-year Treasury note's
price rallied and the yield dropped about 17 basis points, or
hundredths of a percentage point, for the month. Mr. Gross's fund
posted a return of 1.18% in April, beating 1.01% from the benchmark
index.
The tide turned against Mr. Gross in May.
The benchmark 10-year Treasury note's yield soared from this
year's low of 1.61% on May 1, rising to a 14-month peak of 2.235%
on Wednesday. The yield traded at 2.16% Friday and has risen nearly
50 basis points in May, the most on a monthly basis since December
2010.
"This month's rise in yield has been fast and furious," said Jim
Caron, global fixed income portfolio manager at Morgan Stanley
Investment Management, which has over $340 billion in assets under
management. "In the near term, bond yields are likely capped at
2.2%. But the market is still vulnerable to selloff risk."
Mr. Gross said several times in May that the 30-year Treasury
bond price rally was over, though he believed a bear market, or
persistent rise in bond yields, was yet to take shape.
In his Twitter message Friday, Mr. Gross argues that the tepid
pace of U.S. economic growth means the Fed won't move to cut back
on buying Treasury bonds "for now." He says the Fed will likely
keep the key short-term policy rate near zero for a "long time,"
which would keep bond yields low.
Write to Min Zeng at Min.Zeng@dowjones.com
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