Advisers lead Treasury retreat

Mar 13, 2011 @ 12:01 am

By Jeff Benjamin

Financial advisers seem to have implemented Bill Gross' strategy before Bill Gross.

Reports last week that the Pimco bond king had sold his investments in U.S. Treasuries triggered a “been there, done that” response from the financial planning community.

“We got out of Treasuries back in November, right around the start of the [Federal Reserve's second round of quantitative easing],” said Diane Pearson, an adviser with Legend Financial Advisors Inc., which has $380 million under advisement.

The threat of inflation and higher interest rates in the wake of record government spending and stimulus programs such as QE2 also led her to move her clients out of Mr. Gross' $237 billion Pimco Total Return Fund Ticker:(PTTCX) because of its exposure to Treasuries.

“We thought it had more Treasury exposure than we were comfortable with,” Ms. Pearson said.

Recent public filings showed that Mr. Gross, co-chief investment officer of Pacific Investment Management Co. LLC, had, over a two-month period through January, reduced to zero, from 12%, the flagship bond fund's allocation to Treasury bonds.

Advisers, for the most part, said they saw it coming and got out ahead of Mr. Gross.

“With such a period of historically low inflation and interest rates, you would be hard-pressed to find somebody who doesn't think inflation will rise,” said Bill Mertes, chief investment officer at American Financial Advisors Inc., which has $150 million under advisement.

“We started cutting our exposure to Treasuries, not so much related to QE2 but as part of a longer-term approach to control risk,” he said.

Some of the biggest private investors in the bond market, from fund managers to insurers and pension funds, are preparing for an end to the three-decade Treasury market rally as interest rates hover near zero, and spending by the U.S. government and the central bank threatens to fuel inflation, which would drive down the price of the bonds as yields rose.

Strategies range from reducing the longest-dated bond holdings to shifting to higher-yielding corporate debt, along with investing in stocks, commodities, non-U.S. bonds and even holding cash.

“One of the biggest problems financial advisers are finding right now is what to do with the so-called safe cash,” said Scott Miller Jr., managing partner at the $300 million advisory firm Blue Bell Private Wealth Management LLC.

Like a lot of advisers who have moved completely out of Treasuries over the past several months, he is substituting exposure to gold, currencies and Treasury inflation-protected securities.

“I wasn't that surprised to hear Bill Gross had gotten out of Treasuries,” Mr. Miller said. “If you paid attention to what he has been saying, you knew that he's been negative on Treasuries for quite a while.”

That is the basic message that advisers have gleaned over the past year from Mr. Gross' writings and public comments.

“I don't think [Mr. Gross] thinks the U.S. government won't be able to pay, but he thinks rates are going up and Treasuries will get hit first,” said Theodore Feight, president of Creative Financial Design.

He went even further than Mr. Gross by selling all bonds — government and corporate — that aren't coming due within the next year.

“Bonds scare me right now, and unless you're holding them to maturity, you've got to get out,” Mr. Feight said. “In the next five years, we could go to 7% [yields] on the 10-year Treasury.”

After moving his clients out of bonds in December, Mr. Feight placed two-thirds of those assets in high-dividend-paying stocks. The other third has been invested in ProShares UltraShort 20+ Year Treasury Ticker:(TBT), an exchange-traded fund designed to be 200% short the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond Index.

Shorting Treasuries with funds such as TBT has gained popularity, but so far, the strategy hasn't panned out. The ETF declined by 25.7% last year and is up just 1.5% so far this year.

Navigating around the rising risks of U.S. Treasuries clearly has become more art than science, but advisers appear determined not to get caught flat-footed when the effects of inflation start driving down the price of Treasuries.


“I moved my clients out of any mutual funds that held Treasuries 12 to 18 months ago, including the Pimco Total Return Fund,” said Steven Tibbitts, owner of Tibbitts Financial Consulting, a $50 million advisory firm.

In place of Treasuries, he has moved clients into floating-rate-bank-loan funds and international bonds, including emerging-markets debt.

“It's not a matter of whether rates rise, because they will, and when they do, it will be negative for longer-term bonds, especially longer-term government bonds,” Mr. Tibbitts said.

The simple math surrounding the fear of rising rates suggests that for every percentage point increase in interest rates, a bond could expect a 1-percentage-point decline for every year of duration.

Thus, a 1% increase in rates could cause a 15-year duration bond to decline by 15%.

“Short of some type of panic scenario that has everyone rushing to safety, Treasuries are very vulnerable right now,” said Harold Evensky, president and principal of Evensky & Katz LLC, which has $700 million under advisement.

“We don't have a pure Treasury allocation, per se, but we own the Pimco fund, so we're riding with them,” he said.

Mr. Evensky said that he was surprised to see Mr. Gross move completely out of Treasuries, but suggested that the move might have some political undertones.

“Bill Gross sees inflation and rates as being rough on Treasuries, but part of it might have also been to make a political statement,” Mr. Evensky said. “That's his way of telling Washington to finally get together in terms of managing the budget, as opposed to just trying to one-up each other.”

This story was supplemented with reporting from Bloomberg.

E-mail Jeff Benjamin at


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Oct 03


Adviser compensation & staffing: Strategies and research to build a top-performing firm

Competition for established talent in the advice industry is at an all-time high — and the industry's top firms are using compensation and staffing strategies that will likely lead to both short- and long-term success.In this... Learn more

Featured video


Vanguard's Ameriks: Where the elephant in the room will grow next

That noise you hear is Vanguard's ETF's growing. John Waggoner sits down with Vanguard's John Ameriks to discuss where the firm will grow next.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

Hackers may have profited from SEC breach

The hack of the agency's Edgar filing system occurred in 2016, but the regulator didn't conclude until last month that the cybercriminals may have used their bounty to make illicit trades.

Top 10 financial firms ranked by investor satisfaction

Find out which firm took the top slot for overall investor satisfaction for the second year in a row.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print