Legendary bond fund manager Bill Gross and his Pimco colleagues earned plaudits during the 2008-09 financial crisis for picking up Treasury and mortgage bonds on the cheap at just the right time. But it turns out that not all of their moves turned to gold.
New court papers show that they lost big – more than $3.4 billion — in accumulating Lehman Brothers bonds before the investment bank collapsed in September 2008, The Wall Street Journal reports. The court documents are related to Lehman’s bankruptcy.
While some investors made out well buying Lehman bonds after its collapse, Pimco owned more than $4.5 billion of Lehman bonds when it failed.
To be sure, Pimco already has accounted for most – if not all – of the losses. It marked down the bonds’ worth on its balance sheet right after Lehman blew up. Pimco now values its Lehman bonds at about 25 cents on the dollar.
"These holdings have long ago been marked to market," a Pimco spokesman told The Journal. The Lehman losses clearly inflicted little pain on Pimco, whose investment gains in 2008 placed near the top of the industry.
The Total Return Fund produced a 4.32 percent return during 2008, thanks to its long Treasurys position and its avoidance of subprime mortgage securities.
The investment bank’s demise has made all kinds of money for those involved in resolving its bankruptcy. Advisers have earned a whopping $1.26 billion in fees during the bankruptcy period, Bloomberg reports.
Meanwhile, Gross has created huge waves among investors by establishing a bet against Treasurys through Pimco’s Total Return Fund, the world’s largest, in March.
The 10-year Treasury yield has dropped to 3.04 percent from 3.47 percent since March 31, and the fund’s performance has suffered as a result, The Wall Street Journal reports.
Indeed, for May, Total Return Fund ranked in the bottom 10 percent of intermediate-maturity bond funds, with a one-month total return of 0.52 percent, almost 50 basis points below the average fund in its category.
That marks just the fifth time the fund has dropped to the bottom 10 percent of its category for a month since 2003 and the first time since November 2010, according Morningstar data.
Gross maintains that Treasurys are headed for a tumble after the Federal Reserve’s $600 billion Treasurys buying spree ends June 30.
Instead of Treasurys, Gross has opted for bonds from other countries, including Germany and Brazil. Total Return Fund’s other holdings have appreciated, just not as much as Treasurys.
“I was premature,” Gross acknowledged to The New York Times recently. But he says his bearishness will be proven correct.
Gross isn’t the only one voicing qualms about Treasurys.
“For new money that comes in today, there isn’t much of a cushion,” James Sarni, senior managing partner at Payden & Rygel, tells Bloomberg. “The risk of losing money is, I believe, quite substantial.”
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