How Risky Is a Bet In the U.S. Bond Market?
It’s bear season in the U.S. bond market right now — just ask Pimco Co-Founder and Chief Investment Officer Bill Gross, whose $232 billion Total Return Fund, the world’s largest, produced the worst risk-adjusted return over the past year among its peers. Moreover, according to Bloomberg’s riskless return ranking, the Total Return Fund declined 1.2 percent for the year ended March 31, trailing 88 percent of similar funds, while experiencing volatility of 4.3, above the 3.6 average of its peer group.
The poor performance pushed investors away in droves. The Total Return Fund suffered record withdrawals of $41.1 billion last year. Pimco spokesperson Mark Porterfield defended the firm in a statement emailed to Bloomberg: ”We have a complete suite of products with different objectives and risk tolerances. It’s important to compare a fund’s performance with its benchmark and not just with other mutual funds, which could hold riskier and higher-yielding assets. Total Return has outperformed its index for the past 6 months, 2, 5 and 10 years.”
Porterfield is right on the money, but he doesn’t address the reason why Pimco lost some money — which is, in a word (or two), because of the awkward way in which the U.S. Federal Reserve’s aggressive and unconventional monetary policy is interfacing with the ongoing economic recovery. Monetary easing pushed interest rates to historic lows last year, and the taper has made the interest rate environment anything but predictable. Pimco’s poor performance was generally tied up in a bad bet on the timing and impact of the taper.
Gross warned investors as early as June 2013 that the fund would experience some friction that year. At the time, both bond and equity markets were turbulent. Gross told investor, ”We believe caution is warranted not just for fixed income investors, but for investors in all risk assets.” The Fed’s open-ended QE program put downward pressure on interest rates for much of 2013. The yield on the benchmark ten-year Treasury fell as low as 1.6 percent in May of that year, shortly before Pimco warned investors about the rocky road ahead.
The taper was kicked off with relatively little turmoil, but the trajectory of the market is still opaque. The yield on the ten-year T-Note is down about 6.5 percent this year to date. BlackRock’s Chief Investment Officer of Fundamental Fixed Income Rick Rieder attributes the decline to “a combination of investor risk aversion sparked by problems in emerging markets and weakness in economic data, exacerbated in part by weather disruptions.”
The economic outlook for the rest of the year is somewhat more optimistic, but yields aren’t expected to surge even as the taper comes to a conclusion. The recovery should give some traction to funds that underperformed last year.