Bond Exodus at Broad Funds Hits Pimco, JPMorgan
Comment of the Day

November 12 2013

Commentary by David Fuller

Bond Exodus at Broad Funds Hits Pimco, JPMorgan

Here is the opening for this interest report from Bloomberg
In a year of record withdrawals from taxable bond funds, no category has been harder hit than the biggest broad market strategies managed by firms from Pacific Investment Management Co. (PTTRX) to JPMorgan Chase & Co.

Investors yanked $61.8 billion from intermediate-maturity debt funds in the first nine months of the year, while pouring $46.2 billion into bonds maturing in less than three years, according to data compiled by Morningstar Inc. Buyers are showing a preference for shorter-maturity and high-yield bonds that are less sensitive to rising benchmark borrowing costs as the Federal Reserve weighs curtailing the pace of its unprecedented stimulus that's bolstered credit markets.

Concern is mounting that a general basket of bonds won't preserve income and generate returns for investors who reaped average annual gains of 6.3 percent from the start of 2009 through last year. As the central bank prepares to start slowing its bond buying, the Bank of America Merrill Lynch U.S. Broad Market Index is on pace for its first annual decline since 1999.

"People aren't getting enough income from their bond portfolios as they need," Michael Rawson, a fund analyst at Morningstar in Chicago, said in a telephone interview. "You're going to see money come out of intermediate bond funds and into these more income producing bond categories."

Investors withdrew $28.1 billion from Pimco's $247.9 billion Total Return Fund in the first nine months of the year, the most among all intermediate bond strategies, Morningstar data show. JPMorgan's $24.6 billion Core Bond Fund had the third biggest outflow with $4.6 billion of redemptions, while American Funds' $28.2 billion Bond Fund of America reported $4.8 billion of withdrawals.

David Fuller's view This secular bull market is over, which means that a significant bear market has commenced.

Investors have done extremely well in this market which was extended over the last few years by quantitative easing (QE). However, they have been losing money since April of this year, as you can see from the clear trend inconsistencies shown in the last eight months on the Merrill Lynch 10-Yr Total Return Fund. Consequently, only a Japan-style deflation can support further gains. While not impossible, this appears extremely unlikely, despite the soft global economy at present.

It will be very difficult to make money in conventional long only bond funds over the next couple of decades because participants will be on the wrong side of the big trend. From a reasonably active investor's perspective, I would rather consider ProShares UltraShort 20+ Year Treasury. However, this is has to be incrementally traded on a buy-low-sell-high basis, otherwise the yields will eat up all your profits. Remember, this will not go up anywhere near as much as it has come down, because buyers of the UltraShort fund are on the wrong side of the yield. Nevertheless, the best time to own it is in the early years of recovery, while the yields are still comparatively low.

If one wants bonds for income, I would consider some of Tim Price's favourites. Personally, I will use shares for yield and accept the additional volatility.

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