Pimco avoiding commercial paper, bullish on short-term Treasuries

NEW YORK Mon Jul 29, 2013 5:37pm EDT

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NEW YORK (Reuters) - Commercial paper and certificates of deposit are overpriced, the head of short-term portfolios for Pimco said on Monday, saying he favors short-term Treasuries in expectation of an economic slowdown.

Jerome Schneider, who oversees $300 billion in short-term assets for Pacific Investment Management Co, said he is avoiding commercial paper in a broader effort to eliminate risk from the short-term portfolios of Pimco, operator of the world's biggest bond fund.

"We've been generally avoiding corporate credit in the form of commercial paper and certificates of deposit, which have become egregiously priced over the past few months," Schneider, who is also a managing director at Pimco, told Reuters in an interview.

Commercial paper is a type of short-term debt that banks and companies issue to fund their daily operations. Money market funds tend to buy this debt, which often matures in six months or less, because it is fairly safe but carries interest rates slightly higher than comparable U.S. Treasury notes.

Schneider, who is based in Pimco's Newport Beach, California, headquarters, said he favors three- and five-year Treasury notes. Noting that Pimco sees a "slowdown" coming in U.S. economic growth, Schneider said he expects prices on those bonds to rise once the Federal Reserve's forecasts for U.S. economic growth prove overly optimistic.

Bill Gross, a founder and co-chief investment officer at Pimco, said in his July letter to investors that the Fed's U.S. economic forecast was "far too optimistic," including Fed Chairman Ben Bernanke's expectation of 7 percent unemployment by mid-2014.

The U.S. unemployment rate stood at 7.6 percent in June.

Schneider said shorter-dated Treasuries are attractive given the bond market selloff that Bernanke triggered on May 22, when he told Congress that the U.S. central bank could reduce its bond-buying later this year if the economy looked strong enough.

Those bonds are "relatively inexpensive to cheap right now," Schneider said. The yield on the five-year Treasury note has risen roughly 73 basis points to 1.38 percent since May 1, after having peaked at 1.61 percent on July 5. Yields on bonds move inversely to their price.

Pimco, a unit of European financial services company Allianz SE, had $1.97 trillion in assets as of June 30, the firm's website shows.

The Fed is buying $85 billion in Treasuries and agency mortgage securities monthly in an effort to spur hiring and lower long-term borrowing costs.

BIG DEMAND FOR MINT

One of Schneider's funds, the Pimco Enhanced Short Maturity Exchange-Traded Fund, saw demand soar in June despite record monthly outflows of $14.5 billion from Pimco's U.S. mutual funds.

Investors poured over $745 million into the ETF last month, helping boost current assets to roughly $3.9 billion, according to Morningstar. The inflows came as the firm's flagship Pimco Total Return Fund, which is run by Gross and is the world's largest mutual fund, had record outflows of $9.6 billion.

Schneider also said that the Securities and Exchange Commission's proposed reforms to institutional money market funds will inevitably be enforced, despite obstacles. The proposed reforms to the $2.6 trillion money market fund industry are an effort to reduce the risk of abrupt outflows.

The main proposal calls for prime money funds used by institutional investors to transition from a stable price of $1 per share to a floating net asset value, something that would change the degree of risk that a money fund could take on.

Institutional investors have fled prime money funds in anticipation of this change, Schneider said, adding that retail investors could be next to exit.

"That could easily be the follow-on effect that happens over 2014 and beyond," Schneider said.

Institutional money market funds overall suffered outflows of $31.9 billion in June, Lipper data show.

(Reporting by Sam Forgione; editing by Jennifer Ablan and Leslie Adler)

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