Latest round of Treasury showdown goes to Fuss

Bond naysayer watches as interest rate rise over five days, nearly wiping out entire year's coupon

Aug 7, 2012 @ 4:16 pm

By Jason Kephart

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

The Loomis Sayles' vice chairman has been avoiding Treasurys in his flagship Loomis Sayles Bond Fund Ticker:(LSBRX) because of concerns that interest rates may be beginning to rise. Earlier this year, Mr. Gross repositioned his flagship Pimco Total Return Fund Ticker:(PTTAX) so it would hold 35% of its assets in government debt, after being burned by last summer's Treasury rally.

Over the past five days, however, interest rates have begun to tick up slightly thanks to investors shifting to “risk-on” investments because of recent moves by the European Central Bank. With interest rates near historic lows, the slight moves in interest rates have been enough to push principals down enough to wipe out almost an entire year's coupon.

The iShares Barclays 20+ Year Treasury Bond Fund Ticker:(TLT), a popular proxy for long-term government debt, is down 2.75% over the last five trading days, which almost wipes out the fund's 2.77% 12-month yield, according to Morningstar Inc. data. The iShares Barclays 10-20 Year Treasury Bond Fund Ticker:(TLH) fared slightly better. It's 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 US multi-sector fixed income at Schroder Investment Management, N.A. The debt purchasing program has sent short-term interest rates for Spain and Italy 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. It's causing a reversal of the flight to quality.”

In a July 11 statement, Mr. Gross wrote that “market movements have confirmed it, and my own experience in 2011 is a testament to it. Don't underweight Uncle Sam in a debt crisis.”

Of course, five days is far too soon to determine a definite winner, especially with the U.S. election, the fiscal cliff, China and Europe still looming over the future.

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