Pimco, Vanguard hit by selloff in U.S. government debt
NEW YORK (Reuters) - It has been an ugly month for some major bond fund managers, including the reigning king of bonds, Bill Gross.
The sudden sell-off in Treasuries and government-guaranteed mortgage debt has taken a big bite out of the performance of the Pimco Total Return Fund, the world's largest bond fund, which Gross oversees.
As of May 30, Pimco Total Return, with about $293 billion in assets, was down 0.15 percent for the year, according to data collected by mutual fund tracking firm Morningstar. For the month of May, Pimco Total Return is down 1.9 percent.
The performance for the Pimco fund comes at a time when the yield on the 10-year Treasury has risen to 2.2 percent on Friday from 1.63 percent on May 1. Treasury yields have risen amid concerns that the U.S. Federal Reserve could reduce its monthly purchases of $85 billion in Treasuries and agency mortgage debt due to signs of an improving economy.
The yield on the Fannie Mae five-year bond has also risen, to 1.2 percent on Friday from 0.88 percent on May 3, while the yield on the Freddie Mac five-year bond has risen to 1.13 percent on Friday from 0.84 percent on May 3.
The selling in Treasuries and agency mortgage debt began soon after Federal Reserve Chairman Ben Bernanke told Congress on May 22 that the central bank could begin slowing its monthly purchases of securities. The Fed launched the bond-buying program last September to provide a jolt to the economy.
The Vanguard Total Bond Market Fund has had an even tougher time than Pimco Total Return. The fund, with $117 billion in assets, is down 0.82 percent for the year.
Other big bond funds have performed better this year. The DoubleLine Total Return Bond Fund is up 1.56 percent, and the Loomis Sayles Investment Grade Bond Fund is up 1.41 percent.
Jeffrey Gundlach, chief investment officer of DoubleLine Capital, told Reuters on May 15 that he would likely play a selloff in Treasuries by buying more of the debt once the yields on the 10-year breached 2 percent. At that time the 10-year yield was 1.94 percent.
As the performance of Gross's flagship fund has come under pressure this year, Gundlach's fund is besting 94 percent of peers with its 1.56 percent return, according to Morningstar.
But the underperformance of Gross's fund may be most noteworthy given its size and the fact that Gross, co-chief investment officer of Pacific Investment Management Co., is a widely followed commentator on the bond market and macro economics.
In fact, Gross himself generally predicted that May might be an ugly month when he said earlier this month that the 31-year rally in bonds ended on April 29 [nL2N0DR39P].
Gross was not available for further comment.
Pimco Total Return, which had 39 percent of its assets in Treasuries and 34 percent in mortgage debt at the end of April, got caught in the middle of the recent and sudden sell-off in bonds.
The selloff in Treasuries has also spurred selling in high-yield junk bonds as their yield advantage weakens over rising Treasury yields. The yield-to-worst on the Barclays U.S. Corporate High Yield Index has risen from its record low of 4.97 percent on May 7 to 5.63 percent as of Thursday.
Yield-to-worst indicates the lowest potential yield on a bond without the issuer defaulting.
Demand for junk bonds also fell in the latest week. In the week ended May 29, investors worldwide pulled $266 million out of high-yield bond funds, data from Bank of America Merrill Lynch and EPFR Global showed on Friday.
The Pimco Total Return Fund, however, had just 3 percent of its portfolio invested in high-yield debt at the end of April, according to Pimco's website.
(Reporting by Sam Forgione in New York; Editing by Jennifer Ablan and Leslie Adler)
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