Pacific Investment Management Co.’s Total Return Fund increased its holdings of U.S. government debt to the highest in 18 months just as investors including Jeffrey Gundlach and Bill Gross turn cautious.
Treasuries and related securities accounted for 39.7% of the fund’s assets in June, up from 36.4% in May, according to data on the company’s website. The holdings are the largest since December 2014, the figures show. Total Return, based in Newport Beach, California, is the world’s biggest actively run bond fund, with $86.4 billion in assets.
Gundlach, chief executive officer of DoubleLine Capital LP, said Tuesday investors who rushed into debt last week will face a hard time making money as yields find a bottom and begin to rebound. Bill Gross of Janus Capital Group Inc. has said sovereign yields, near all-time lows in the U.S. and around the world, are too risky.
Bond investors are weighing the benefits of adding to their holdings as U.S. data show uneven growth, with employment surging in June after stagnating in May. Bonds surged globally in the second quarter as the U.K.’s vote to leave the European Union drove investors to the relative safety of fixed income. Investors seeking alternatives to negative yields in Japan and Europe helped fuel the rally in U.S. government securities.
“I’m still bullish” on Treasuries, said Lee Junhyeok, a bond investor in Seoul at Mirae Asset Securities Co., which oversees $7.9 billion. “The flight to safety will continue this year. The economy’s rebounding, but it won’t’ be an instant rebound.” The Federal Reserve will refrain from raising interest rates, and U.S. 10-year yields will fall about 20 basis points by year-end, he said.
The bears drove prices Tuesday, with Treasuries plunging the most in almost two months as demand sank at a 10-year note sale. The auction drew bids for 2.33 times the amount of debt offered, the lowest in seven years. The U.S. is scheduled to sell $12 billion of 30-year bonds Wednesday.
Prices rebounded before the sale. The benchmark 10-year yield fell four basis points, or 0.04%age point, to 1.47% as of 8:37 a.m. New York time, according to Bloomberg Bond Trader data. It set a record low of 1.318% July 6. The 1.625% security due in May 2026 was at 101 14/32.
The Total Return Fund increased the duration of its holdings to 5.7 years from 4.7 years. Duration is a measure of a bond portfolio’s sensitivity to changes in yield, and a longer position reflects a more bullish view. The fund’s stake in government securities can include Treasuries and related investments such as inflation-protected bonds, futures contracts and agency debt, according to PIMCO’s website.
The Fed will probably be on hold for several months, though traders have gone too far in betting the next rate increase won’t come until 2018, Mark Kiesel, one of the three managers for the Total Return Fund, said last week.
“The probability of them hiking is higher than what the market’s priced in,” Kiesel said on Bloomberg Television.
DoubleLine’s Gundlach said in a webcast Tuesday there’s a “mass psychosis” among investors seeking yield. “Call me old-fashioned, but I don’t like investments where if you’re right you don’t make any money.”
Janus’s Gross said low yields “are not up my alley,” on Bloomberg Television last week. Morgan Stanley, one of the 23 primary dealers that underwrite U.S. debt, followed by telling clients it’s turning neutral on U.S., Japan, German and U.K. bonds after last week’s rally.
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