Latest round of Treasury showdown goes to Fuss

The latest round in the heavyweight showdown over Treasuries between Pimco's Bill Gross and Loomis Sayles' Dan Fuss has gone to the latter.

Loomis Sayles & Co. LP's vice chairman has been avoiding Treasuries in his flagship Loomis Sayles Bond Fund (LSBRX) because of concerns that interest rates may be beginning to rise. This year, Mr. Gross, managing director and co-chief investment officer at Pacific Investment Management Co. LLC, repositioned his flagship Pimco Total Return Fund (PTTAX) so that it would hold 35% of its assets in government debt, after being burned by last summer's Treasury rally.

Last week, rates ticked up, thanks to investors' shifting to “risk-on” investments because of recent moves by the European Central Bank. With rates near historic lows, the slight moves in interest rates have been enough to push principals down enough to wipe out a significant amount of a year's coupon.

NEAR WIPEOUT

The iShares Barclays 20+ Year Treasury Bond Fund (TLT), a popular proxy for long-term government debt, was down 1.58% last week, which wiped out more than half of the fund's 2.77% 2-month yield, according to Morningstar Inc. data.

The iShares Barclays 10-20 Year Treasury Bond Fund (TLH) fared slightly better. It was down 1.66% over the same time period and has a 12-month yield of 2.41%.

The reason for the short-term swing is the European Central Bank's announcement that it would buy unlimited short-term European sovereign debt, said David Harris, head of U.S. multisector fixed income at Schroder Investment Management North America Inc. The debt-purchasing program has sent short-term rates for Italy and Spain tumbling to 4%, down from the 7% level that most see as unsustainable.

“It bought a lot of time for Spain and Italy to fund themselves over the short term and to work on a bigger solution,” Mr. Harris said.

“There's a little bit of relief going on,” he said. “It's causing a reversal of the flight to quality.”

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