The Pimco Total Return Fund, which
lost its place as the world's largest bond fund this year, cut almost two-thirds of its U.S. government debt holdings in May just in time for a June selloff.
Total Return, run by Pacific Investment Management Co., reduced government and related debt to 8.5% of assets from 23.4% in April, according to the company's website, amid a second-quarter selloff in Treasuries. Benchmark 10-year yields reached an eight-month high on Wednesday, jumping from 2.12% at the end of May.
“We are seeing a bearish sentiment in the market and we are heading for higher yields as we approach the first” Federal Reserve interest-rate increase, said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “All of the fundamentals are pointing in a bearish direction for the bond market. There is a reflation theme building.”
(More: With performance up, outflows at Pimco Total Return Fund slow)
Treasuries extended their decline Wednesday, with the 10- year yield rising five basis points, or 0.05 percentage point, to 2.49% at 6:51 a.m. New York time, according to Bloomberg Bond Trader data, the highest level since Oct. 1. The 2.125% note due May 2025 dropped 13/32, or $4.06 per $1,000 face amount, to 96 27/32.
Treasuries are selling off as part of a global bond rout, triggered by a decline in Germany that started in April as investors balked at record-low yields. U.S. job growth beat analysts' expectations last week, underpinning forecasts for the Fed to boost borrowing costs this year.
STEEPEST DECLINE
U.S. government securities handed investors a 2.5% loss since the end of March through Tuesday, heading for their steepest quarterly decline since the last three months of 2010, based on Bloomberg World Bond Indexes.
Mizuho Asset Management says it's not planning to change its bullish stance as U.S. inflation holds near zero.
“We acknowledge that yields are rising,” said Yusuke Ito, a senior fund manager at Mizuho in Tokyo. “But the fundamental story hasn't changed. We are sticking with our view.”
Mizuho pointed to a low inflation rate as a reason to be bullish. The Fed's preferred gauge fell to a five-year low of 0.1% in April.
Pimco's Total Return Fund has returned 1.5% in the past year, beating 61% of its peers, according to data compiled by Bloomberg.
Its largest position is mortgage-related bonds, which accounted for 34.6% of holdings as of May 31, according to the website. The government category isn't limited to Treasuries but can include related investments such as futures contracts and agency bonds, it says.
Total Return Fund, with $107.3 billion of assets, is managed by Scott Mather, Mark Kiesel and Mihir Worah after
Bill Gross left the company in September. It gave up its place as the biggest bond fund to the Vanguard Total Bond Market Index Fund, according to data compiled by Bloomberg.
